Depositors are usually the people who decide when to withdraw their funds from their bank or credit union. But with a Callable (CD), it’s the financial institution that tells you when it is time to take your money and go home.
What Is a Callable CD?
A Callable CD is a type of certificate of deposit that allows the issuing bank, credit union, or brokerage firm to “call,” or redeem, the CD before its maturity date. This means the financial institution can terminate the CD, return your principal, and stop paying interest after a certain period. They generally pay a higher interest in exchange for the ability to call the CD early. The call will typically be exercised if interest rates decline. While you still receive your initial deposit and accrued interest to that point, you lose the opportunity to continue earning the originally promised rate.
How Do Callable CDs Work?
Callable CDs usually have a set period – such as six months to a year – where they cannot be called. After that period, the bank, credit union, or brokerage firm has the right to call the CD at its discretion.
You can reinvest the funds in a new CD, but more than likely, at a lower rate.
Pros of Callable CDs
- Higher Interest Rates: Callable CDs often have higher rates compared to non-callable CDs to compensate for the call risk.
- Call Protection Period: This is the period set by the financial institution where the CD cannot be called/terminated, and for which the rate is guaranteed.
- FDIC and NCUA Insurance: Like standard CDs, callable CDs are typically FDIC- or NCUA-insured up to applicable limits, offering security for your deposit. Male Make sure to check with your financial institution for their insurance status.
Cons of Callable CDs
- Early Redemption Risk: If the CD is called, your reinvestment options may be at lower rates, potentially reducing your long-term earnings.
- Non-Guaranteed rate for the entire CD term: The rate is only guaranteed for the non-callable period. Once the call protection period has ended, the CD can be called at any time. This results in the interest rate not being guaranteed for the length of the CD. However, if the CD does not get called, the original rate continues through maturity.
- Limited Upside: If interest rates rise, you’re still locked into the initial rate unless you pay a penalty to withdraw early, as is required by most financial institutions.
What to Consider Before Opening a Callable CD
Callable CDs can offer attractive rates, but they come with the risk of early redemption. If you’re considering one, make sure you understand the terms, have a plan in place if the CD is called, and consider the following:
- Interest Rate Outlook: Financially, institutions may be more likely to call the CD if rates are expected to decline. If rates rise, your funds remain locked in at a lower rate.
- Call Protection Period: Check how long the CD issuer guarantees the rate before the CD becomes callable. The longer the protection, the better.
- Reinvestment Plan: If your CD is called, have a strategy for reinvesting your funds to avoid being stuck with lower rates.
- Alternative Options: Compare callable CDs to other high-yield savings products or non-callable CDs to determine if the risk is worth the reward and if there are other fixed-rate investments paying similar rates that are non-callable.
FAQ
What is a Callable CD?
A Callable CD is a certificate of deposit that gives the issuing financial institution the option to “call” or redeem it before it reaches maturity. If interest rates fall, it may choose to return your principal and stop paying interest after a predetermined period of time. You will get your initial deposit back plus interest earned to that point, but you lose the opportunity to earn the full interest rate for the entire term.
How do Callable CDs work?
Callable CDs come with a no-call period – usually six months to a year – where the financial institution cannot redeem the CD early. After that period, it can decide to call the CD, returning your original deposit along with any interest earned up to that point.
