What is a Term CD?

A term cash deposit, or term CD, is a savings account where your money is meant to be untouched for a specific period of time. As opposed to short-term CDs, term or long term CDs usually have a maturity date of more than 12 months. Cash deposit accounts are meant to increase your savings risk-free, as the money deposited is insured against loss.

A term CD is different from a traditional savings account in that your money is kept for a set amount of time. In return, the bank will sometimes grant you a higher interest rate than it would for a savings account. Your money in a CD is meant to make more money for you, as long as you leave it alone for the entire term.

It is possible to remove your money early from a term CD but it usually comes with stiff early withdrawal penalties. On some long-term accounts, you can lose 6 months to 1 year worth of interest. Generally, removing your money before the CD reaches maturity is discouraged, but allowed as financial need may sometimes be unpredictable; if you have to have surgery and can’t pay for it, it’s most likely worth the penalty to be able to get the money out of the account.

Interest on most CDs does not remain in the CD account, as it does with a savings deposit. Instead, you can often opt to have it mailed to you as a check or direct-deposited into another account of your choosing. While this prevents you from getting compound interest as the amount in your account rises with each interest dividend, it does mean that you get the interest to spend each month or quarter. For maximum savings, check with your bank to see if they offer a term CD with compounding interest rates.

You might assume that a term CD would earn much more in interest than a short-term CD as banks want to give you incentives for leaving your money with them for longer. This is not always the case, due to the fluctuating market. Because no one can reliably predict the state of the financial market more than a few months or a year in advance, it is safer for banks to assume that the interest rate in the far future will drop rather than rise. Buying short-term CDs is a strategy that some investing experts recommend, as they are more predictable.

Some term CDs offer variable-rate interest, which puts the worry of risk on the investor. Instead of a fixed term rate, these CDs will fluctuate with the market, sometimes higher, sometimes lower. If you are convinced that the interest rate will be in a rising trend for the next 5 years, then this is a great CD for you. If the market drops steadily, however, your interest might shrink to next to nothing. Bear in mind that since your initial deposit is insured, you cannot lose money on the account, but some investors warn against variable interest rates as the fluctuation of the market is never certain.

A term CD can be a great way to increase your interest dividends and train you to be disciplined with your savings. By agreeing to put away your money for more than a year, you are giving up access to it against the idea that you will have more at the end of the term. For more information regarding types of CDs available, contact your bank or lending institute, or speak with a financial adviser.