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Guide to Short- vs Long-Term Certificates of Deposit (CDs)

By Dan Miller · June 17, 2022 · 8 minute read

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Guide to Short- vs Long-Term Certificates of Deposit (CDs)

A Certificate of Deposit (CD) is similar to a savings account, but it comes with a twist: You have to deposit a lump sum in and agree to not touch the money for a specific period of time: e.g. a few months to a few years. The shorter the time period (or term) of the CD, the lower the interest rate it will pay; the longer the term, the more interest you may earn on your money.

These days, though, the difference in the amount of interest you can earn from a long- vs. a short-term CD isn’t always significant. Nonetheless, it’s one of a few factors to consider when deciding which type of CD is right for you.

Certificate of Deposit Overview

A Certificate of Deposit is a type of account offered by most financial institutions, like banks or credit unions. With a CD you make one initial deposit to fund the account, and then your money remains in the account until the end of the term of the CD.

How long does a certificate of deposit last? One big difference between savings accounts and certificates of deposit is that with a savings account, you can deposit or withdraw money at any time. However with a CD you can’t deposit any additional money, and if you withdraw money before the end of the term, you will likely face early withdrawal penalties.

There are some no-penalty CDs on the market that don’t charge a penalty for pulling money out early, but be sure you understand the terms and potential tradeoffs in terms of lower rates or fees.

Recommended: What is a Certificate of Deposit and How Does it Work?

Are CDs Insured?

CDs are typically insured by the FDIC for up to $250,000, which makes them a relatively safe investment. Any money you deposit, up to $250,000, would be covered in the event of fraud or a bank collapse.

If the CD is issued by a credit union, it would be insured for the same amount, by the National Credit Union Administration (NCUA).

There are some CDs that are not federally insured, however, like a Yankee CD (which is a CD offered by the U.S. branch of a foreign bank). Be sure to understand the terms before you open the account.

How Long Are CD Terms?

Back to the question: How long does a certificate of deposit last, generally speaking? All CDs come with a term, and different banks might offer CD investing with different terms. As noted, the longer the term of the CD, generally the higher the interest rate paid out. While there aren’t definitive rules that differentiate between a short-term CD, medium-term CD, and long-term CD, the following is a general guideline:

•   Short-term CDs — 1 year or less

•   Medium-term CDs — 2 to 3 years

•   Long-term CDs — 4 years or more

What Is a Short-Term CD?

A short-term CD is a CD whose term is lower than average, generally 1 year or less. Different banks offer CDs with different terms, but 3-month and 6-month CDs are common.

A short-term CD gives you greater flexibility as you’ll have access to your money sooner than with a longer-term CD. But typically a short-term CD also offers lower interest rates than CDs with longer maturity dates. (Remember that the annual percentage rate or APY is different from the interest rate.)

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Why Should I Consider a Short-Term CD?

The biggest advantage of a short-term CD is that it typically pays more than a standard savings account, and you have more flexibility than with longer-term CDs. This can be helpful if you need to save money for a large purchase, when you’d like to earn a steady rate, but you know you’ll need access to the money relatively soon.

Also, with a short-term CD your money is only tied up for a relatively brief period of time, so if interest rates rise and you want to invest elsewhere — or you decide you need your money for some other purpose — you would only need to wait a few months before you could withdraw your money without a penalty.

Advantages of Short-Term Certificates of Deposit

•   Higher interest rate than savings or money market accounts.

•   A relatively safe place to park savings for a big purchase, while earning a steady rate.

•   If rates change or your needs shift, you won’t have to wait long to access your money.

Disadvantages of Short-Term Certificates of Deposit

•   Lower interest rates than medium-term and long-term CDs.

•   You may be able to find higher rates with other financial products (e.g. a high-yield savings account).

Recommended: How Do High Yield Savings Accounts Work?

What Is a Medium-Term Certificate of Deposit?

A medium-term certificate of deposit is a CD whose maturity date is 2 to 3 years. That means that once you invest your money in the CD, you won’t be able to withdraw that money without penalty until the end of the 2- or 3-year period.

Generally medium-term CDs offer higher interest rates than short-term CDs but lower rates than long-term CDs.

Why Should I Consider a Medium-Term CD?

A medium-term CD can make sense if you are saving money for something that won’t happen until a few years down the road.

You’ll want to make sure that you also have an account to store short term savings like an emergency fund. That way, you are less likely to feel the need to withdraw your money before the term of the CD is up.

Advantages of Medium-Term Certificates of Deposit

•   Higher interest rates than short-term CDs.

•   Predictable rate of return with low risk.

Disadvantages of Medium-Term Certificates of Deposit

•   Lower interest rates than long-term CDs.

•   Risk of inflation or interest rates going up while your money is tied up in the CD.

What Is a Long-Term Certificate of Deposit?

Generally speaking, a long-term certificate of deposit is a CD that has a term of 4 years or more. Long-term CDs offer the highest rates of any type of CD, but the rates you’ll earn even with a long-term CD are lower than historical stock market averages. That said, the beauty of CDs is that they offer a predictable rate of return, in a vehicle that’s relatively low risk.

The tradeoff to the higher interest rates that come with long-term CDs is that you won’t have access to your money for several years without paying a penalty.

Why Should I Consider a Long-Term CD?

A long-term CD can be an option if you have money that is set aside for a specific purpose that won’t happen for several years. You might not want to put money that you know you’ll need in the stock market for growth.

Be careful though — if inflation or interest rates rise during the term of your CD, you might find the interest rate on your CD to be not as great as you thought it was.

Advantages of Long-Term Certificates of Deposit

•   Highest interest rates of any type of CD.

•   The predictable rate of return can help balance more volatile investments in your portfolio.

Disadvantages of Long-Term Certificates of Deposit

•   Your money is tied up in the CD for several years.

•   Risk of inflation or interest rates going up while your money is tied up in the CD.

•   You lose out on potential market growth while your money is tied up.

The Takeaway

Investing in certificates of deposit can be a smart way to earn a higher interest rate than you’d typically get from savings or money market accounts. The tradeoff is that most CDs will charge an early withdrawal penalty if you remove your money before the end of the CD’s term, so you have to be willing to lock up your funds for the specific term of the CD you choose (i.e. a few months to a few years).

Generally, CDs with longer terms offer higher interest rates than shorter-term CDs, so make sure to shop around for different rates before opening a CD. You may also be able to find competitive rates with other accounts, like high-yield savings.

Speaking of, if you’re looking for great interest rates while keeping flexible access to your money, consider SoFi’s all-in-one mobile banking app. Eligible account holders can earn a competitive APY when you sign up for direct deposit. That rate can compare favorably to the rates on CDs offered by some banks, and you maintain easy access to your money — without an early withdrawal penalty.

Better banking is here with up to 4.60% APY on SoFi Checking and Savings.

FAQ

Which makes more money: a short-term CD or long-term CD?

CD rates vary widely, so if you’re wondering what is a good return on investment for a CD, it can pay to shop around to find the best rates. Most times, you will make more money with a long-term CD compared to a short-term CD.

What happens if you need to withdraw your money from a CD prior to its maturity date?

You’ll get the best returns from your CD if you keep the money in the account until it reaches maturity. But if you do need to withdraw your money before the CD matures, you generally can. You’ll just need to pay an early withdrawal fee — often losing a couple of months’ worth of interest. Check the terms when you open the CD.

How old do you have to be to open a CD account?

To open a CD, you have to be a legal adult, which is usually 18 or 21 years old, depending on the state. Parents can still invest in CDs for their children or other minors, through use of a custodial account.


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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.


Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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