Locating the Most Advantageous Rates For Your Portfolio
Almost every financial institution offers certificates of deposit (CDs) to their customers. Finding the highest yield rate can take a little bit of work but can be well worth the effort because the payouts will be higher.
Non-Traditional Banks
The highest CD rates often come from non-traditional banks. All banks work by taking in deposits at one interest rate and lending that same money out at a higher rate. Without deposits, there can be no loans. Traditional banks with large branch networks are often able to attract cheap deposits because of checking accounts, which generally pay no or very little interest. Because of this source of cheap funding, traditional, branch-based banks do not need to offer the the most competitive CD rates.
Non-traditional banks also do not have the overhead of physical locations, keeping their costs low. Because of this, financial institutions that do not have a high cost structure are able to pay better interest rates on CDs. Looking beyond the neighborhood bank can be very rewarding.
Credit Unions
Credit unions are also potential sources for great interest rates, as these institutions are generally not run to maximize profits. Because of their differing goals, credit unions often pay higher CD rates to their members than what can be found elsewhere.
Shop Around
When looking for a CD, shopping around can be beneficial. Many institutions that are interested in growing quickly will offer special deals on CDs, basically paying a larger interest rate to attract customers quickly. Like sales in retail, these deals can happen without notice and are usually only offered for a limited time. Sometimes the offers can be very attractive, so it can be very profitable to pay attention for special rates.
Compare Options
In looking at different CD options, it is important to compare the same size and term of CD. Larger dollar amount CDs(Jumbo CDs) usually come with higher interest rates because the financial institution is able to get a larger amount of deposits all at once without having to open up and service many accounts. Also, the longer the term of the CD, or the time it takes for the CD to mature, also has an effect on the interest rate. Except in rare circumstances, the longer the amount of time the higher the rate of interest will be.
The market for CDs is very competitive, so many financial institutions will have similar rates. Because of this, the best CD rates may only be slightly higher than other options out there. It makes sense to take the highest rate available, as even small differences can add up to significant additional earnings over time.
Within a portfolio, a CD is a great choice for limiting risk or to save for a cash flow event in the future. Because of this, it is imperative that any institution that offers a CD be backed by the FDIC or else the principle of the CD may be at risk. Picking a slightly higher rate does not do any good if the institution is not around to pay the interest.