Choosing Between Short-Term and Long-Term CDs.


Investing in a certificate of deposit (CD) with a short period to maturity can be beneficial if you don’t want to tie up your money for too long. Short-term CDs may also be a good choice if you think interest rates are going up, and you don’t want to commit to a long-term CD with a low interest rate. Long-term CDs usually offer a higher interest rate and Annual Percentage Yield (APY) and give you better returns on your investment, but, like short-term CDs, there are penalties for withdrawing your money early.

What is a CD?

A CD allows you to invest your money for a set period of time and earn interest. Typically, CDs have a higher interest rate than savings or checking accounts. In order to earn that higher rate, you must commit to keeping your money invested in the CD until its maturity date. If you withdraw your money before the CD matures, you’ll generally pay a penalty. 

Benefits of a short-term CD

When choosing a CD, ask yourself how long you can go without accessing your investment. A short-term CD can have as short a term as three months. Typically, the shorter the term, the lower the interest rate and APY.

Short-term CDs may be the way to go if you expect the interest rates for CDs to rise, and you don’t want to lock yourself into a long-term CD with a fixed rate. The Federal Reserve (FED) has raised interest rates three times in 2018 and announced that it will likely raise them once more this year. When the FED raises interest rates, the downside is the cost of loans for homes and cars goes up, but the upside is that the interest rates and APY on CDs usually rise.

Benefits of a long-term CD

For most banks, the longer the term of the CD, the higher the interest and APY. Popular Direct offers CDs with terms as long as five years. Long-term CDs usually provide a higher rate of return than money market accounts, checking accounts, or savings accounts. They are also low-risk compared to the stock market because most of them offer a guaranteed APY.

Bottom line

Whether you pick short-term or long-term CDs, here are some questions the U.S. Securities and Exchange Commission recommends you ask to help you pick the best CD for your needs:

  1. Is your investment protected with federal deposit insurance?
  2. What fees, if any, will you be charged to purchase the CD?
  3. What is the maturity date?
  4. What is the penalty for early withdrawal?
  5. Is the interest rate on the CD fixed or variable?

At Popular Direct, you can purchase a CD for as little as three months and as long as five years. Check out Popular Direct’s CD Rate Calculator to find out how much you might earn.1

The information mentioned in this article is for informational purposes only, is intended to provide general guidance and does not constitute legal or tax advice. Each person’s situation is unique and may materially differ from the information provided herein. You should seek the advice of a financial professional, tax consultant and/or legal counsel to address your specific needs before any financial or other commitments regarding the issues related to your situation are made. Popular Bank does not make any representations or warranties as to the content contained herein and disclaims any and all liability resulting from any use of or reliance on such content.

1 A penalty will be imposed for early withdrawal. Fees may reduce earnings on the account.