If you are looking for higher interest rates than what banks offer on CDs, brokered CDs are a great option. Brokered CDs allow you to withdraw money without penalties but their market value changes based on interest rates, unlike Bank CDs.
Let’s take a look at the pros and cons of brokered CDs.
What you need to know about brokered CDs
CD vs Brokered CD
Certificate of Deposit (CD)
CDs are a type of a saving account that guarantees a fixed rate of return over a fixed period. But if you withdraw your money early, you will need to pay a withdrawal penalty
Brokered CDs are offered by banks but you can buy them through brokerages. They are covered by FDIC insurance just like CDs.
Advantages of a brokered CD
When you buy a bank CD, you will usually pay a penalty if you have to withdraw your funds early. The penalty for early withdrawal can be several months of lost interest. But with a brokered CD, you can sell it at any time. Note that the brokered CD trades like bonds and its value changes on the interest rate environment. So you could lose money with a brokered CD but you can have the peace of mind that it can be sold and converted to cash at any time.
No need to deal with a bank
When you buy a CD, you have to work with a bank. To get the best interest rate on CDs, you have to be constantly swapping the bank you park your money with. But a brokered CD can be bought and sold from a brokerage account.
While CDs are generally available for up to 5 years, brokered CDs can have terms that are more than 20 years. If you want to lock in rates for the long term, brokered CDs are an excellent option.
Get more than the FDIC insurance limit of $250,000
If you have a CD with a bank, your insurance caps at $250,000. But with your brokerage account, you can buy CDs from multiple banks. So you have coverage of more than the FDIC limit of $250,000.
Disadvantages of a brokerage CD
Brokered CD offers simple interest
With a CD, you get compound interest on your investment. But with a brokered CD, you get simple interest but the interest rate is likely to be higher.
FDIC insurance is available only on bank-issued CDs, not securities
Brokered CDs are FDIC-insured if they are bank products. If they are a security, then it’s not FDIC insured. Please do your due diligence before buying a brokerage CD.
Brokered CD offers several benefits – high interest rates, longer terms, and withdrawals without penalties. The downsides include the potential to lose money due to changing interest rates and only getting simple interest on your investment.