The Dangers Investors face using Callable CDs

People are often drawn by numbers than by just facts. The truth is that we stop to look at numbers and think of all the promise attached to it without actually thinking about the actual events that are happening. This may be the same thing about callable Certificates of deposit.

Callable CDs that are said to have higher interest rates than usual CDs. Financial Companies pass them off as the “better” choice and have investors look at the numbers without letting them understand the real situation. These may be a good decision at first but let us take a closer look at the processes and the usual effects of callable CDs to an investor.

Callable CDs are CDs but it has an added clause to it as well as higher numbers to show investors. Usually Callable CDs reel in investors with the promise of having higher interest rates of about 0.5 to 1 percent higher than normal. This is where they reel in the investors. The real problem here lies in the reason why they are called callable. They are called callable because the company can call back your CD investment at their own convenience and even without your permission.

What happens in normal accounts is that when an account has been created, you as the investor need to wait for the account’s maturity before you can liquidate it. The same goes with the company that you invested your money in. They need to follow the terms of the contract until the account’s maturity before they can actually remove your account. This is in fact beneficial to the investor since they will be given protection and a guarantee of their profits under the terms and agreements of your contract.

With callable CDs you lose this protection since the companies will be able to remove your account whenever they deem fit after the call protection period expires. This usually leaves the investors powerless with their investments once the protection period expires since the company will now have free reign with your account and they can now manipulate it practically at will without giving you just compensation for it though they usually give you a notification of what they plan on doing with your account.

We can clearly see the problem of having callable CDs. The greatest problem with this may be the loss of security for the investor. They lose the ability to make decisions for their own accounts and leave their investments in the hands of the company in which they have made the agreement. The problem here lies in the fact that you lose your guarantee than with normal CDs.

Another problem here is that callable CDs also forces the interest risks on the investors. Whether it is rising or falling rates scenario, usually it is the investors who lose in this kind of deal. When the rates fall, the company has the option of calling back your account where you will not be stuck with having to reinvest the principal at lower rates. At times of rising rates, you may now be stuck with having a CD that actually pays below market rates.

Also, remember that you will not be able to sell your CDs at will until the time of its maturity. If you do decide to actually want sell your CDs you may be facing significant principal loss since it is difficult for you to find buyers and the second reason is that because you will not be getting a good price for it. Though there are also upsides to using callable CDs, it is often thought that the negative sides are more significant than the positive side.