Everyone who is interested in finding investment opportunities knows that getting the best rates of interest is very important. But some people, especially those new to investing, may think that finding good rates is the only step. This mindset is especially true in the case of certificates of deposit. Finding good rates is really just the first step, albeit a crucial one, in a number of steps to smart investing. So how do you know if the return you’re getting on the investment is worth the initial deposit? Well here’s how.
The Next Steps
The first mistake some people make is not reading through the CD contract before signing it. The second mistake is reading through the contract but not asking questions when something doesn’t make sense. These contracts can often sound convoluted and complex to the average investor. But it is very important that you understand every section and every detail of the terms and conditions on the CD. When something doesn’t make sense or sounds fishy than don’t be afraid to ask for it to be explained. Only when you feel confident that you understand the contract should you sign it.
Things to Look For
Below are some specific things that you should look for in a CD’s terms and conditions:
- Interest initiation and payment dates – Different certificates of deposit begin accruing interest at different times, such as a month after the initial deposit versus right when the account is opened. Also learn how often the interest is accrued, such as daily or monthly. Finally you should know about how the interest is paid out. Can you get the interest paid to you early, or do you have to wait until the CD matures? And under what conditions would interest not be paid?
- Callable – Some contracts will state that the CD you are investing in is a callable CD. What this means is that the issuer has the right to call, or take back, whenever they want. If this happens at all it will usually be when the market rates dip lower than what is being paid on the account. The bank or lending institution will pay any accrued interest to you but you have no control over the account being terminated. You can see why this would be a crucial factor to understand. Some contracts with callable CDs give you the second option of being able to rollover your funds to a CD with the lowered rates, while others will simply terminate you and you will be on your own.
- Penalties – The one big condition of most CDs is that you cannot cash in on your account before the maturity date without having a heavy penalty placed on you. The amount of this penalty will vary from lender to lender, so be sure to look for that in the contract. Sometimes these extra fees may be worth it if you find another CD with better terms and interest rates, but that just depends.
- Variable term – As stated before, no standard certificate of deposit will allow you to withdraw your funds early without incurring a penalty. But what some lenders will let you do is negotiate for a better rate of interest if one comes along. This option is known as a variable term, and usually the one stipulation is that you will have to invest a little more money into the CD.
So basically the bottom line is to not stop investigating once you have found a great CD rate, but to keep going and make sure you understand all of the terms and conditions that are tacked on to the CD. There are many different places to look for CDs, such as banks and credit unions, but the Internet is actually a great place to start because of how easy it is to compare rates from dozens of lenders side by side. Happy hunting!