What is a callable CD and is it a good idea to open one?

What is a callable CD and is it a good idea to open one?

Exploring Callable CDs: A Comprehensive Guide

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If you’re looking to take advantage of the best CD rates, there are a variety of types of CDs you can explore. Callable CDs, in particular, can offer high interest rates. But because of their distinct features, they may not necessarily be suitable for all circumstances. Let’s dive into the world of callable CDs to understand them better and see if they could be a good fit for you.

What is a Callable CD?

A callable CD is a special type of certificate of deposit. Unlike traditional CDs, which cannot be called back by the issuing institution before maturity, callable CDs give the brokerage firm or financial institution the right to ask for the CD back at any time. However, callable CDs usually have a call protection period, which means you are protected from the issuer calling the CD during a specific timeframe after opening the account. This call protection period can last for a few months or years, depending on the term of the CD. After this initial protection period, the issuer has the option to either reinvest your money or provide you with the principal and any interest earned up to that point.

Callable CD vs. Non-callable CD

Although callable CDs share similarities with traditional CDs, there are a few key differences between the two. The chart below summarizes these similarities and differences:

Are Callable CDs a Good Idea?

Whether callable CDs are a good option or not depends on various factors. According to Elizabeth Plot, CFP and founder of Primas Financial Planning, they can be a suitable choice if you expect CD rates to remain steady since it reduces the chances of your CD being called back. Additionally, if CD rates are rising, the likelihood of early redemption decreases, making callable CDs a decent option in such a scenario.

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However, Spencer Betts, CFP and financial consultant with Bickling Financial Services, mentions that callable CDs may not be favorable if CD rates drop significantly due to aggressive rate cuts by the Federal Reserve. If this happens, the issuing institution may call back your CD, leaving you with lower returns compared to the current market rates.

It’s also important to consider your comfort level with the possibility of changes in a CD. If you prefer stability and a guaranteed return, a traditional non-callable CD might be a better option for you.

Callable CD FAQs

1. What is a callable CD?

A callable CD is a type of certificate of deposit that can be called back by the issuing institution before maturity.

2. How does the call protection period work?

The call protection period is a timeframe after opening the account during which the CD cannot be called back. This period provides some security to the depositor.

3. Is it possible to lose the initial deposit and interest earned?

No, if the CD is called back, you will receive your initial deposit and any interest earned up to that point, but you will miss out on any remaining interest that would have been earned if the CD had reached maturity.

In conclusion, callable CDs can offer higher interest rates and may be suitable for individuals who anticipate stable or rising CD rates. However, they come with the risk of early redemption if CD rates drop significantly. It’s essential to carefully consider your financial goals and risk tolerance before investing in callable CDs.

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