When considering a certificate of deposit (CD) as a savings method, it’s important to understand the difference between traditional bank vs. brokered CDs. Learn more about each type, as well as the advantages and disadvantages.
What Is a Bank CD?
Bank CDs are long-term savings instruments that are offered directly by various banks and credit unions. These banks take in deposits via CDs with the intention of loaning these funds out. Because money invested in a CD is locked up for a period of months to years, the bank has less risk in terms of depositors withdrawing money that could be used for such loans. Often a bank will offer CDs with different maturities, with the yields increasing over time.
What Is a Brokered CD?
Brokered CDs are brokered by a third party. They are bought by brokerage firms and then resold to consumers. Sometimes brokered CDs have significant fees and may not be as low-risk as you think.
Advantages and Disadvantages of Bank CDs
Bank CDs are the more traditional savings vehicle. You can walk into any bank branch or buy them at any online-only bank easily. For most people who have less than $250,000 to invest, bank CDs are usually a better deal. If you want to get out of a bank CD early, usually you must give up some interest, but you get to keep your entire capital. Before you get any CD, you should get informed about what you are buying by asking the right questions.
Advantages and Disadvantages of Brokered CDs
The biggest difference between bank CDs and brokered CDs is the way they are bought and sold. Brokered CDs are bought and sold by brokerage firms instead of directly by the bank. If you want to get out of a brokered CD early, then you sell the CD like you would a stock, bond, or mutual fund. Instead of closing it out—as you would at a bank—you’re selling it on the secondary market. In an environment where interest rates are rising, if you sold a brokered CD early, you’re likely to lose money. The biggest advantage of brokered CDs is the ease of depositing large amounts of money in different banks through a brokerage firm. This allows you to keep your deposits under $250,000 at each institution, which means that you are insured by the FDIC.
