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When choosing a certificate of deposit (CD), you have to compare a few figures to make the right call for your needs — any minimum balance requirements or the amount of interest earned, for example. But perhaps no number looms larger in your mind than the CD's term length.
There's no simple answer to the question "Are short-term or long-term CDs better?" Instead, you have to reflect on your goals for the money saved and how comfortable you are with keeping your money isolated from the current interest rate changes. Here are some tips on how to think through whether a short-term or long-term CD is better for you.
What is a CD term?
A CD's term refers to how long you must keep your money in the account before it "matures," after which you can withdraw your money plus any interest earned. You can find some CDs with terms as short as a month or as long as a decade, but usually, the terms range from three months to five years.
Traditionally, long-term CDs offer higher interest rates than short-term ones. This makes sense when you consider why a bank pays interest on CDs — they want to keep your deposit as long as possible, so they create an incentive for you to pick a CD with a longer term.
But in certain economic situations, the market flips the script, and CDs with shorter terms earn more interest than long-term CDs. The reasons behind this change can be complicated (to put it mildly), but at the most basic level, banks pay less interest on long-term CDs when they believe the Fed will lower interest rates overall. In other words, the bank doesn't want to be locked into paying you a high interest rate on a 5-year CD if it believes rates will significantly drop before then.
Benefits of a short-term CD
There's no strict definition of what makes a CD short or long-term, but usually a "short-term CD" refers to an account with a maturity date that ranges from a few months to one year. People often use short-term CDs when they want a safe place to park their funds for a limited time, usually to earn higher interest than a traditional or high-yield savings account and to avoid committing to a longer-term CD.
A short-term CD may be helpful those who are saving for short-term goals such as:
- Vacation
- Down payment for a car
- Wedding
- Home improvements
By "locking your money up" in a CD, so to speak, you can avoid the temptation of spending those savings before you're ready. Short-term CDs offer more flexibility than long-term CDs because you can access your funds sooner, but you do miss out on the compounded growth that comes with locking away your money for a longer period.
If you prefer to store your funds for a short period, Marcus by Goldman Sachs and Popular Direct are two banks that offer plenty of options with competitive APYs.
Marcus by Goldman Sachs® CDs
Annual Percentage Yield (APY)
From 3.95% to 4.40% APY
Terms
From 6 months to 6 years
Minimum deposit
$500
Early withdrawal penalty
For CD terms under 1 year, the penalty is 90 days of simple interest. For terms between 1 year and 5 years, the penalty is 180 days of interest. For terms of more than 5 years, the penalty is 270 days of interest. No-penalty CDs are not subject to a penalty after seven days.
Terms apply.
Pros
- Above-average APYs
- Low $500 minimum opening deposit
- 10-Day CD rate guarantee
- Offers no-penalty and bump-up CDs
Cons
- No-penalty CD doesn't allow a partial withdrawal
- No physical branch locations
Popular Direct CDs
Annual Percentage Yield (APY)
From 4.15% to 4.95% APY
Terms
From 3 months to 60 months
Minimum deposit
$10,000
Monthly fee
None
Early withdrawal penalty fee
For terms less than 91 days: The fee is 89 days simple interest; For terms equal to or greater than 91 days but less than 12 months: The fee is 120 days simple interest; For terms equal to or greater than 12 months but less than 36 months: The fee is 270 days simple interest; For terms equal to or greater than 36 months but less than 60 months: The fee is 365 days simple interest; For terms equal to or greater than 60 months: The fee is 730 days simple interest
Terms apply.
Benefits of a long-term CD
A long-term CD usually has a term of more than one year. People use long-term CDs to lock in a fixed interest rate for an extended period or if they're saving for long-term goals such as:
- Down payment for a home
- Paying for a child's education
- Opening a business
- Paying off student loans
However, since your funds are locked in, access is limited and you could miss out on higher returns if interest rates rise. On the upside, a long-term CD allows you to secure a favorable rate before the potential rate drops. Both Synchrony Bank and Discover have longer-term CDs with competitive APYs and no monthly fees.
Synchrony Bank CDs
Annual Percentage Yield (APY)
0.25% to 4.35% APY
Terms
3 months to 5 years
Minimum deposit
None
Early withdrawal penalty
An early withdrawal penalty may be applied if you withdraw funds from the principal prior to the maturity date. For no-penalty CDs, withdrawals are not allowed within the first 6 days after account funding. After that, only the withdrawal of the entire balance is allowed.
Terms apply.
Pros
- Above-average APYs
- Nine term options, from 3 months to 5 years
- No minimum deposit
- Offers no-penalty, bump-up and IRA CDs
- If the rate increases within 10 days of account opening, you're automatically bumped up to the higher rate
Cons
- No physical branches
- No-penalty CD doesn't allow partial withdrawal
APYs are subject to change at any time without notice. Offers apply to personal accounts only. Fees may reduce earnings. For CD accounts, a penalty may be imposed for early withdrawals. After maturity, if your CD rolls over, you will earn the offered rate of interest for your CD type in effect at that time.
FAQs
Do you pay taxes on short-term CDs?
Any interest earned on CDs is considered taxable income by the IRS, whether it's withdrawn or reinvested.
Is it better to do a longer or shorter CD?
It depends on your goals – short-term CDs offer quicker access to funds, while long-term CDs help you lock in a fixed rate for a longer period.
Is a 3-month CD worth it?
A 3-month CD can be worth it if you need a short-term, low-risk place to store cash while earning a bit more interest than a traditional savings account.
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