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Promotional Certificate of Deposit (CD): How It Works

By Caroline Banton · July 15, 2022 · 5 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Promotional Certificate of Deposit (CD): How It Works

A promotional certificate of deposit (CD), or bonus CD, is a type of savings account offered by a bank or credit union for a short time to attract new deposits.

Like regular certificates of deposit, interest is earned on the funds that the account holder agrees to invest until the CD’s maturity date (usually a few months to a few years). While additional money can’t be added to the CD, it does provide a fixed rate of return. And CDs are insured up to $250,000.

Promotional CDs usually offer favorable terms such as a higher-than-normal interest rate, but they may also have stricter criteria for that initial deposit, such as requiring a higher initial investment. If you’re curious about investing in a promotional CD, you may want to weigh the pros and cons.

What Is a Promotional CD?

A promotional CD is a timed deposit account, similar to a regular CD, but offered with more advantageous terms for a short period.

Banks and credit unions offer these accounts to attract new investors and build capital, which they can then invest at a higher rate elsewhere. Just like regular CDs, promotional CDs earn interest on the deposited amount at a set rate until maturity. Most CD accounts are insured by the FDIC or NCUA.

Because there are a wide variety of CDs — including jumbo CDs and brokered CDs, and more — it’s wise to explore the exact terms of the CD you’re interested in, including interest rates, fees, and other stipulations.

How a Promotional CD Works

Banks use promotional CDs to attract new investors, and to build capital that they can then invest elsewhere at a higher interest rate. Promotional CDs will have better terms than a regular savings or CD account, but they may also require a higher initial deposit.

Like any CD these are low-risk investments, so generally the returns will be lower than other investments, like stocks. While bonds are also generally lower risk vehicles, and bonds can seem similar to CDs in that they pay a fixed rate, the typical rate on a CD is often lower than a bond.

At maturity, promotional CDs are often rolled over into another CD that pays a lower interest rate, or they can be cashed out. Some banks might offer a higher rollover rate to retain the investment. The financial institution will generally charge a fee if an account holder withdraws the funds before the maturity date.

Example of a Promotional CD

Let’s say an investor wants to set up a certificate of deposit investment plan. They invest $5,000 in a CD for five years. A bank that offers a five-year promotional CD with a competitive 3% annual percentage yield (APY) would provide earnings of around $800. A regular savings account with a lower rate of 2% would earn about $520 with the same $5,000 deposit.

For investors who don’t need to receive interest payments each year, a zero-coupon CD provides a return when it is sold for its face value at maturity. The face value will be higher than the initial investment.

CDs are safe investments with a fixed annual return. As noted above, most CDs are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). Share certificates, CD equivalents issued by credit unions, are insured up to the same amount through the National Credit Union Administration (NCUA).

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When to Consider Opening a Promotional CD?

A promotional CD makes sense when a bank or credit union is offering a better interest rate than a regular CD or savings account, you have the required amount to invest, and you don’t need the funds for the length of the CD term. While it’s impossible to say for sure which investments are the safest, if you’re worried about the higher risk associated with investing in assets like stocks or bonds, a promotional CD is a reasonably safe investment.

For example, CDs are sometimes used as college savings accounts or when parents are thinking about how to create an investment plan for a child.

When a Promotional CD Does Not Make Sense

A promotional CD does not make sense if you may need the funds before the maturity date of the CD. The bank or credit union will charge a fee if you withdraw your funds early. In some cases, you might want to consider a no-penalty certificate of deposit.

Also, CDs do not keep up with inflation, so once taxes are paid on the interest earned, there may not be much of a return on the investment. If you want to explore other ways to earn interest, you might consider high-yield savings, or fixed-income investment.

The Pros of Promotional CDs

The main advantages of promotional CDs are that they are safe and predictable.

•   Promotional CDs, like regular CDs, are a safe investment with a guaranteed rate of return.

•   Funds are insured by the FDIC up to $250,000.

•   The interest rate is fixed for the life of the CD, which helps to predict income.

The Cons of Promotional CDs

The main disadvantages of promotional CDs are that they do not offer high returns because they are low risk.

•   The promotional rate is generally only offered for shorter maturity terms, and the rollover option is often to a standard CD at a lower rate (not the promotional rate).

•   Promotional CDs often require a larger initial deposit.

What Are Typical Promotional CD Rates?

Promotional CD rates depend on the bank, the length of the term, and the amount deposited. Most promotional CDs are shorter-term: e.g. about a year or less. Rates as of July 11, 2022 might be as high as 2.5%.

Are Promotional CD Rates Worth It?

When interest rates are down, investing in the stock market using an IRA or 401(k) may make more sense than a CD. Also, promotional CDs are often offered by banks with low interest rates overall, and what one bank considers a competitive rate might be much lower than other banks’ standard rates.

The Takeaway

For risk-averse investors who want to invest a sum safely and know exactly what return they can expect, a promotional CD can be a good option. It’s a way to take advantage of temporary favorable interest rates offered by a bank or credit union that will yield a higher return than a simple savings account.

That said, there are some savings accounts that offer higher rates. When you open an online bank account with SoFi, you can qualify for 1.80% APY when you set up direct deposit. These innovative, all-in-one accounts offer a highly competitive rate, all the convenience of mobile banking, and no minimum balance or account fees.

FAQ

Can a certificate of deposit be discounted?

CDs are not sold at a discount, unlike other short-term money market instruments. CDs pay interest on the money deposited usually on an annual basis. For CDs with a maturity of less than one year, interest is paid at maturity, and taxes are due on the earnings each year. However, for investors who don’t need to receive interest payments each year, a zero-coupon CD provides a return by being sold for their face value at maturity, which is higher than the initial investment.

What is the typical interest rate for a certificate of deposit?

A typical interest rate for a CD could be as low as 0.5 to 2.6% for CDs with a one-to-five-year term. It depends on the bank and the terms.

What is the typical minimum balance for a certificate of deposit?

A typical minimum balance for a CD ranges from $500 to $5,000 or more, depending on the CD and the bank. Jumbo CDs typically require a $100,000 deposit. Some banks offer CDs with no minimum balance requirement.


Photo credit: iStock/Ridofranz

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 1.80% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 1.00% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.80% APY is current as of 07/26/2022. Additional information can be found at http://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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