How Does a Certificate of Deposit Work?

A Certificate of Deposit (CD) is an investment instrument that pays you a certain percentage of interest based on the length of time that you invest the money. CD’s can be purchased in a variety of lengths of time, ranging from 6 months to ten years or more. Percentage rates vary on a certificate of deposit. Your percentage rate will be based on what the current rates are as well as the duration of your deposit. Percentage rates change on a weekly basis. When you are ready to invest into a CD you will need to shop around for the best offerings in your area.

You can purchase a CD from any bank or financial institution. These banks will take that money and invest it into stocks and bonds or use the money to lend other customers. They will in turn pay you interest for allowing them to use the money for their business purposes. A certificate of deposit is a safe way for investors to make some extra money on their savings because it involves little risk.

Interest rates are not necessarily higher because the investment is for a longer period of time. When you invest into a CD you should look for the best interest payment and pick that length of deposit. Some banks, in an effort to raise quick capital, will offer very high rates on a short term deposit. If you have the money available to sit and earn for you, invest in the highest interest bearing CD regardless of length of time.

Once your CD matures you will have the option to cash it out or roll it over for another period of time. You will only have a few days to make this decision when the CD hits maturity. If you do not act at that time, your CD will automatically roll over and you may not get the best interest rate. You are not required to roll it over at the same rate or for the same length of time. Rolling over the interest into the new CD will also enable you to defer some taxes and earn more money on your new certificate of deposit.

CD’s are also a very good form of collateral. Banks and other lending facilities will gladly accept a CD as a form of collateral on a personal loan. In rough economic times, when loans are hard to acquire, this may be a perfect answer to your financial needs. Your Certificate of deposit will continue to collect interest while being held as a form of collateral. Most banks will offer very low interest rates on personal loans when a CD is used this way. Private lenders will also accept this type of collateral on a personal loan, but may not give as low of interest rates on the loan as the original bank that issued the CD.

CD’s are a very easy way to start saving for your future. They are very low risk and easily accessible. Researching current rates and time requirements, prior to purchase, will enable you to make the most interest with your money.

Thanks to Victoria for this great guest post!

{ 2 comments… read them below or add one }

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