Certificates of Deposit: Locking a Rate and What It Costs
A CD is a bet that rates will fall. Right now that bet has a modest payoff.
At a glance
Figures checked 1 Sep 2026
What to take away
- The rate is fixed for the term, which protects you if rates fall and traps you if they rise.
- Early withdrawal penalties are usually stated as months of interest.
- Compare against a savings account paying a similar variable rate before locking up.
A certificate of deposit pays a fixed rate for a fixed term. Break it early and you forfeit a stated amount of interest — typically three months’ worth on a one-year CD and six months’ worth on longer terms.
When a CD makes sense
- You have a known spending date, such as a house closing in nine months.
- You expect rates to fall and want to keep today’s yield.
- You want to remove the temptation to spend the money.
When it does not
When the CD rate is no better than a competitive savings account. Locking up money for the same yield you could get with full liquidity is paying a price for nothing.
No-penalty CDs pay slightly less but allow withdrawal after an initial period. They are a reasonable middle ground when you want a rate guarantee without the lock.
Common questions
Most banks roll the CD into a new term automatically unless you act within a short grace period, often ten days. The renewal rate is frequently uncompetitive — diary the maturity date.
They trade on a secondary market, so you can sell before maturity at whatever price the market offers, which may be below par. They also carry no early withdrawal penalty.