Table of Contents
A callable certificate of deposit (CD) pays interest similar to a regular CD but can be “called” or redeemed by the issuing bank before the maturity date, limiting the return for the investor.
Regular CDs are designed so that investors get back their principal plus a fixed amount of interest when the CD matures. But those who own callable CDs may not get the interest they expected if the bank calls the CD early.
Callable CD interest rates tend to be higher because of this potential risk.
Key Points
• A CD pays a fixed interest rate but can be redeemed early by the issuing bank, which may limit the investor’s total return.
• Callable CDs typically offer higher interest rates than regular CDs to compensate investors for the risk of early redemption.
• If a callable CD is called before maturity, the investor receives their principal plus the interest earned up to the call date.
• Banks are more likely to call a CD when interest rates decline, allowing them to refinance at lower rates.
• Callable CDs are generally considered low risk and are federally insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA) in case of bank failure.
What Is a Callable CD?
A callable CD, like a callable bond, means that the bank has the power to terminate the CD before the maturity date. This may happen if there’s a drop in interest rates.
For example, if an investor opens a bank account and buys a two-year callable CD, the bank could close it out as soon as six months after it’s opened, or any time after that, generally at six-month intervals (depending on the terms of the CD). The investor would then get back their principal and the amount of interest earned up to that point.
It’s important to note that only the issuer has the ability to call the CD early. The investor must leave their money in the CD until it’s called or reaches maturity, or they’ll likely face an early withdrawal penalty.
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How Does a Callable CD Work?
Callable CDs are similar to regular CDs, which are time-deposit accounts offered by banks, credit unions, and brokerages. These accounts provide a fixed interest rate on the funds the account holder has deposited for a specific term (usually a few months to a few years).
Callable CDs generally offer higher interest rates. But unlike a regular CD, a callable CD has a “call” feature, which allows the financial institution to decide whether it wants to stop paying the account holder the higher interest rate. This typically occurs when interest rates begin to drop. At that point, the issuer can close out the CD and return the funds to the investor, plus any interest earned up to that point.
The bank typically offers a premium interest rate to account holders in exchange for the risk that the CD might be called.
Recommended: APY vs Interest Rate: What’s the Difference?
Callable CD Example
Let’s say an account holder decides to deposit $10,000 into a callable CD that has a three-year maturity with a 5.00% interest rate. The bank, however, decides to call the CD after a year because interest rates have dropped, and the bank can now offer CDs at a 4.00% interest rate.
In this case, the account holder would get their $10,000 back, along with the interest accrued, before the bank redeems the CD. That would be about $500 versus the $1,500+ the investor might have earned if they had been able to hold the CD to maturity.
Are Callable CDs FDIC-Insured?
Callable CDs, like most types of CDs, are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) or the NCUA if the CD is issued by a credit union. If there’s a bank failure, federal deposit insurance protects the money held in a callable CD up to that amount.
If the CD was issued by a brokerage, which is generally known as a brokered CD, the CD isn’t technically FDIC-insured. However, the brokerage’s underlying purchase of the CD from a bank typically is FDIC insured (though it’s a good idea to check to make sure before you open a brokered CD).
Maturity Date vs Callable Date
The maturity date is when the CD reaches maturity and the investor can redeem the CD for the principal plus interest accrued during the length of the CD. They can choose to take the earnings or renew the CD.
The callable date is the earliest date at which the CD issuer can close the CD. The first callable date can generally be as soon as six months after the CD was opened and can typically occur any time after that, at six-month intervals (for example, one year, 18 months, two years, and so on).
Be sure to read the terms of a CD, but especially callable CDs, as the callable date can vary. For example, you could buy a callable CD with a five-year maturity date and a one-year callable date (the earliest date the issuer can call the CD). That means, at the very least, your money would earn a year’s worth of interest.
Pros of Callable CDs
There may be several advantages to opening a callable CD.
• Callable CDs typically pay higher interest rates compared to regular CDs. Since account holders are taking on the risk of the bank redeeming the callable CD prior to its maturity, the account holder gets a higher interest rate in exchange for taking on this risk.
• Like most CDs, callable CDs are generally considered lower-risk investments. If the bank decides to terminate the CD before its term, you’ll typically still receive the original deposit amount as well as the interest that accumulated until that time.
• In the event of a bank failure, your money is federally insured up to $250,000.
Cons of Callable CDs
While there are positives to callable CDs, these savings vehicles can have some downsides.
• If the account holder needs access to capital and has to withdraw their money prior to the callable CD’s date of maturity, they’re subject to early withdrawal penalties, which can eat up some or all of the interest earned.
• In the event that interest rates decline, the bank could call the CD early, in which case the account holder wouldn’t receive the same return they would have if the callable CD were to finish its full term.
Where to Open a Callable CD
You can open a callable CD with a bank or credit union, or with some brokerages. Choosing an NCUA- or FDIC-insured financial institution ensures your money is protected.
With a brokered CD, the CD should be insured through the bank that the brokerage purchased the CD from, but be sure to check that this is the case before opening the CD.
The Takeaway
If you’re looking for investments that are generally lower risk, provide predictable returns, and are protected by federal insurance, callable CDs might fit the bill. Callable CDs could build your savings by paying a higher fixed interest rate for a specific period of time. However, the account holder takes the risk that the bank might exercise the call option and close the account before the CD matures.
If you’re interested in earning a higher rate on your savings, you may want to consider other savings vehicles as well, such as a high-yield savings account with a competitive APY that’s higher than the rate offered by traditional savings accounts. Explore the options to choose what best suits your needs.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
What is a callable vs a non-callable CD?
Callable certificates of deposit (CDs) pay interest for a specified term, like traditional CDs do, but the callable CD rate tends to be higher because the bank can redeem the CD before it reaches maturity. A regular CD doesn’t have a call feature.
Why would a bank call a CD?
Usually, a bank would call a certificate of deposit (CD) in the event of falling interest rates. The bank redeems the CD because, with a drop in rates, it can then pay lower rates to its CD holders.
Can you lose money on a callable CD?
Generally, you can’t lose money on a callable certificate of deposit (CD), but you might get less of a return than you’d hoped for. In the event that the CD is called, the account holder receives the principal along with interest that was accumulated up to that point in time instead of receiving the return for the full term of the CD.
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