Unlike a regular savings account where you might move money in and out a few times per month, a CD generally involves leaving your deposit in that account for the length of the CD’s term, which can be months to years. The longer you agree to leave your money in the account, the more interest you’ll typically earn. If you pull the money out before the CD reaches maturity, you often face penalties. With a renewable CD, your new term begins after the initial one ends. However, the interest rate wouldn’t necessarily be the same when your CD gets renewed. The funds will roll into a new CD that typically is based on current interest rates, not whatever the rate was for the previous CD. Different types of banks might offer renewable CDs but have their own nuances in terms of what they offer. If the CD is automatically renewable, the financial institution should specify if there is a grace period. That would allow you to still withdraw your funds if you do not wish to start a new CD. Once any grace period expires, the CD would renew with the financial institution. So, while renewable CDs can help you continue to earn interest, you might prefer to take their money out after maturity and explore other investment options rather than continue to hold it in a CD.
Example of a Renewable CD
Say you open a renewable five-year CD this year and it reaches maturity in five years. You have the option to renew after those five years. When renewal comes along, interest rates are higher than when you opened the CD, so you decide to renew. During your grace period, you consider withdrawing your money to invest in stocks. However, because stocks are higher risk and you want a low-risk investment option, you keep your money in the renewable CD. Once the grace period ends, your bank rolls your money into the new renewable CD.
What a Renewable CD Means for Individuals
Understanding renewable CDs can help individuals make better investment decisions. In general, investors might choose CDs if they want to reduce risk but still want to earn more interest than they would with a typical savings account. However, that doesn’t mean you should approach CDs without careful consideration. In particular, a renewed CD would generally be based on current interest rates offered by the financial institution, so you may wish to compare rates and shop around for potential promotional rates on a new CD or other investment that may best suit your needs.
