Despite how great liquid certificates of deposit may seem, they will not be to the advantage of every investor. Their biggest benefit is the fact that they offer early withdrawals without penalties, something which standard CDs do not provide. The typical CD comes with hefty fees and penalties for those who wish to cash out on their investment prematurely. But despite this Liquid CDs are not without their own drawbacks.
Learning More About Liquid CDs
The terms and conditions and interest rates on CDs will differ widely from bank to bank. And the no-penalty guarantee only works if you abide by the withdrawal guidelines, which usually place restrictions on when you can withdraw and how much you can take out. For example, most lenders make you wait seven days before you can withdraw anything, and many of them will only let you withdraw a couple of times a year. You are also sacrificing yield for flexibility because Liquid CDs have pretty low interest rates.
- Withdrawal limits – As mentioned before, Liquid CDs often come with a lot a limitations. They may restrict how much money you can take out, placing minimum and maximum withdrawal amounts on the account. They may also restrict how often you can take money out, such as once a month or once every seven calendar days.
- Higher deposit minimums – Unlike standard certificates of deposit, which give you a wide range of investment opportunities, Liquid CDs occasionally have larger investment minimum requirements. For instance, at some banks the minimum deposit required on a Liquid CD is $25,000. And if you happen to drop below that amount at some point then you will be charged with an early withdrawal penalty.
- Lower rates – Most Liquid CDs come with lower interest rates than those found in standard CDs and other types of money market accounts. The short-term CDs are the worst, with yields that are immensely lower than the average rate. Long-term Liquid CDs have better rates, but you are giving up flexibility and tying up your funds for a longer period of time.
The marketing strategy of Liquid CDs is that they don’t have fees for early withdrawal (if you stay within the guidelines). However the downsides might be enough to deter some investors. Terms and conditions are different amongst various lenders, so if you do want a Liquid CD you should do some comparison research before you pick anything. If Liquid CDs don’t seem like the right decision to you than you might be better off with a standard CD, such as a Short-Term CD.