Brokered CDs: Good for selection and resale
While brokered CDs are more complex, they do have their own unique benefits.
For one, brokered CDs don't have early withdrawal penalties. Instead, to break your contract early, you have to sell them on a secondary market. Depending on CD rates at the time of sale, this could result in a gain or loss for you.
For instance, if you were to sell a 2-year CD with a 5.00% APY at a time when the best CD rates were 3.00%, you would likely sell it for a gain.
In contrast, banks don't typically have secondary markets on which you can sell your CD. Unfortunately, banks often only give you one avenue to exit your CD contract early: the early withdrawal penalty. Most banks impose penalties equal to a set amount of interest, earned or not.
A 1-year CD, for example, might have a penalty of three months' interest. Worse, it will impose it even if you had the CD for just two months.
Another advantage of brokered CDs is their variety. Often, you'll find numerous term lengths, ranging from seven days to 20 years. Brokers also sell CDs from numerous banks and CD issuers, with each unique provider coming with its own policy of FDIC insurance. This is beneficial if you have a large deposit (like $1 million), as you can spread your money out and get more than the typical $250,000 in coverage.
A few options for brokered CDs you might want to consider include:
Which CD is the better investment for you?
Brokered CDs are well suited for those who want to capture today's high interest rates but would also like the option of cashing out before the CD term expires. You might also be attracted to their longer-than-usual terms or the wide selection of banks, thus increasing your FDIC insurance.
But if you just want a plain old-fashioned CD -- without the gamble of selling it on a secondary market -- stick with the bank. In fact, many of the best CDs have rates that are comparable to brokered CDs -- and sometimes even higher.
The early withdrawal penalty is a risk to consider, but as long as you play it safe, you can earn high interest without the complicated process that comes with brokered CDs.
