Do Callable CDs Make Sense in Today’s Rate Environment?

by. Ken Tumlin

A callable CD allows the bank to redeem the CD at the time of the call option or anytime thereafter. The time period from when the CD is opened to when the call option takes effect is known as the lock period. During the lock period, the bank can’t redeem the CD. Lock periods typically range from three months to two years. A traditional CD does not allow the bank to redeem the CD during the term.

Callable CDs are common for brokered CDs, but they are rare for direct CDs that are sold directly from banks and credit unions. Every now and then I come across an institution offering callable CDs.

Should savers ever consider a callable CD as an alternative to a traditional CD? Many readers have commented over the years that they consider a callable CD to be too favorable for the banks. As one reader commented, it’s a “heads the bank wins; tails I lose” proposition.

The main reason one would choose a callable CD over a traditional CD is for a higher interest rate. The higher the rate premium of the callable CD, the more attractive it becomes.

Another reason to choose a callable CD is the interest rate environment. Callable CDs are most risky when interest rates are falling. In a falling interest rate environment, the CDs will likely be called and the depositor will lose the high rate. However, if rates are flat or are rising, there will be less chance that the CD will be called. If the CD is called in a rising rate environment, the depositor should be able to find another CD with the same or higher rate.

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