Certificate of deposit, which is widely used for savings account has its advantages and as well as disadvantages. Bank customers open a CD savings so as to save extra cash and have interest from it.
You can that a certificate of deposit or CD is a certificate issued by a bank to a person depositing money for a specified length of time at a specified rate of interest.
Definitions of certificate of deposit
According to Wikipedia, A certificate of deposit is a time deposit, a financial product commonly sold by banks, thrift institutions, and credit unions. CDs are similar to savings accounts in that they are insured “money in the bank” and thus virtually risk free.
From investopedia, A certificate of deposit (CD) is a savings certificate with a fixed maturity date and specified fixed interest rate that can be issued in any denomination aside from minimum investment requirements.
A CD restricts access to the funds until the maturity date of the investment.
Or this simpler explanation, a certificate of deposit or CD is a certificate issued by a bank to a person depositing money for a specified length of time at a specified rate of interest.
Banks or other financial institutions don’t issue certificate of deposit unless a customer requests for it. Some customers who finds it difficult to save often go for CD, cause it helps in saving money plus the internet derived from it.
In as much we have certificate of deposit advantages, we also have its disadvantages. On this post, we will discuss both of them and also how it works.
Certificate of deposit advantages
I’ve listed and explained the advantages of certificate of deposit, and you can also add yours through the comment box.
1. Ability to save
To save money is one of the reason people go after it, especially if you have a project at hand. When requesting for a deposit of certificate, there’s a certain sum amount of money (requested by the customer) which the bank keeps on weekly or monthly basis.
The money will be kept safe by the bank until the time, month or year(maturity) which the customer requested to collect the cash.
For example, i’m a wage or salary earner, every week or month i do recieve $5000. From the money, i requested that my bank should keep $1000 from the money that i do recieve, and i wouldn’t make a withdrawal more that is more $4000 per month.
Bank or the financial institution will do as i requested, and if i withdraw more that the money agreed by me and my bank, i will pay a fine(penalty).
So this helps the customer to save a lot money, though depending on the amount agreed or invested.
2. Intreset Rate
Some do say that savings account don’t yield any interest rate at all, so if you’re among those, try and have a CD savings as it gives you that which you want.
One of the good certificate of deposit advantages is that it’s a relatively safe investment.
Even if the market changes, the matured CD will maintain the value expected at purchase. However, if the funds are drawn before the maturity date, a fee will be applied.
4. Account access
Depending on your bank and account’s products terms, you may be able to withdraw your money from a CD—though as you’ll see in the cons section, taking cash from a CD early may have a penalty associated with it.
These are the certificate of deposit advantages that i know, but below are the disadvantages.
Certificate of deposit disadvantages
Typically, the rate of inflation is not congruent with CDs, and in some cases, the rate of inflation may grow faster than the interest on a CD.
Though this may not always be a concern, it’s one that should be taken into consideration, particularly for long-term CDs.
1. No Liquidity
CDs are designed to entice investors to keep their money in the CD until the end of the term. As such, early withdrawal before maturity will typically result in a penalty.
Since you can’t simply withdraw funds like you could with a savings account, this type of asset isn’t considered to be liquid in the way a savings or checking account would be.
2. Cash Tied Up
Due to the fact that you have agreed to amount of withdrawal and the amount which you will save in the bank, you have tired your cash. The longer the maturity term, the higher the interest rate.
If you are forced to cash in your CD before maturity, you usually incur a substantial loss of interest as an early withdrawal penalty. Customers or investors try as much as possible not to get penalised for this.
Typically, you lose three months’ interest on a CD maturing in one year or less and six months interest on a CD with a maturity of more than one year.
These are the disadvantages of certificate of deposit, you can help us and add more to this thanks.
How does a certificate of deposit work
A CD is a form of deposit, where money must stay in the bank for a certain length of time usually agreed by both partners, until maturity.
An investor or a bank customer earns more interest than the normal savings account, not only that, the longer the money stays the higher the interest rate gets. But in the case you withdrew before the maturity date, you will a penalty you’d have to pay.
The longer the term, the higher the interest rate.
You’ll earn interest on the deposit until it matures, at which point you can collect the full amount.
You can get a certificate of deposit from bank or any other financial institution. Read about them before taking a decision, and when you have made up your mind, go to institution and request for a CD.
Some banks requires that before you can have a certificate of deposit with them, first you must have a savings, current or a business account with them.
And that’s all i’ve on certificate of deposit advantages and disadvantages, and also how it works.