What is a Certificate of Deposit
In normal savings account, there is no restriction of the period for which the money would lie with the bank and the depositor has every right for complete or partial withdrawal as per their wish and need. But not so, in case of Certificate of deposit where you have to promise the bank that you would let the money be with them for the period agreed mutually by both. The bank in return would promise to pay an interest rate which would be considerably higher than other savings account.
Hence, it can be said that Certificate of deposit is just like the normal Savings account with some strings attached to them. Unlike the normal savings account the depositor would be barred from making any withdrawal till the specified period as agreed upon. The rate of interest s definitely much higher in this case and it is directly proportional to the period of deposit.
In other words, it means that if you deposit the money for a longer period of time, you can expect a higher rate of interest. So, it is always profitable to deposit money for a long period of time in order to fetch more interest. The rate of interest would decrease if the period of deposit chosen by you is less. You can choose from the period range of 3 months to 10 years and would be restricted from withdrawal of money within the period chosen from this range.
However, if you still chose to withdraw before the expiry of the period agreed upon by both parties then the bank deserves the right to charge a penalty fee. Even if you are in ardent need of money and want withdrawal then also the bank will not take your problems into consideration and you would be charged the penalty fee as per the terms and conditions.
If you desire hefty rate of interest then it is better to opt for the 10 year period because you would be entitled much higher rate of interest in this case. The minimum rate of interest is offered on duration of 3 months and albeit it is not very favorable yet most people prefer it because of the short locking period.
The minimum amount of money that can be deposited in case of Certificate of Deposit also varies from one bank to another. Most banks have a minimum deposit limit and you have to abide by them. These are great forms of investment and if you have spare money in hand then it is wise to save them in a CD. The higher the money saved in the CD, higher is the rate of interest availed by you.
In order to determine the period for which the deposit be made, you must consider your personal goals and priorities. A good analysis of the expenses would help you develop an estimate of the amount of money that you would be requiring in some span of time. Based on these analysis; you can choose the locking period. However, if you have large funds that are spare then you can choose to save them in different CD of varying span of time so as to prevent the penalty of withdrawal.