5

Consider below's no-penalty CDs offered by the same bank with the same rules. Why would anyone go for the shortest CD (7 months) if one can get a better rate getting the 13 month CD and close early without penalty if needed?

  • 2.15% -> 13 Month
  • 2.10% -> 11 Month
  • 2.05% -> 7 Month
7
  • Are there rules limiting how often a no-penalty CD can be opened? If the interest rate is rising 0.25% in the next 6 months, you'd be better off with a 7 month CD to maturity and a new CD at the higher rate, than breaking a 13-month CD and not being eligible to open a new one.
    – Ben Voigt
    Oct 30 '18 at 6:10
  • 1
    What bank is it? That doesn't make sense....thus your question.
    – TTT
    Oct 30 '18 at 7:32
  • @TTT It's being offered by Gsbank (Marcus), Ally, etc.
    – brt
    Oct 31 '18 at 3:59
  • @BenVoigt Looks like you can close and open another CD within two days.
    – brt
    Oct 31 '18 at 4:00
  • 1
    @TTT: Ally has just one no-penalty CD term: 11 months. The rate schedule on that no-penalty CD family depends on the deposit size, not term.
    – Ben Voigt
    Oct 31 '18 at 14:11
4

In this case there is no reason to purchase the shorter term CD. I suspect the product choices exist because:

  1. Some people may not realize this and choose the lower rate products. The bank makes a little extra profit when this happens.
  2. Offering a choice enables astute people to be excited with choosing the highest rate and perhaps like the product slightly more due to their knowing they "beat the system", even if just ever so slightly.

While we're at it: let's point out that not only do you get to lock in the higher rate, if rates go up further I see nothing preventing you from closing out and re-opening at the higher rate, again for the longest term available.

Update: Here's the product Marcus by Goldman Sachs is currently offering: enter image description here

I couldn't take it and I had to know, so I called them. (I already had them on speed dial from a personal loan I did with them.) The person I spoke to confirmed there is no real benefit to the shorter term product. I also asked about closing and re-buying if rates go up, and she agreed you can do that, but "that's not what CD products are designed for".

As a side note, I don't want this to be misconstrued as Marcus trying to take advantage of uninformed customers that may choose the lower rate. I have personally done a no-fee Marcus loan (as a credit score experiment while moving around CC debt between 0% promotions), and I found their customer support to be top notch, and it was one of the most pleasant loan experiences I ever had.

1
  • 1
    Appreciate the research!
    – brt
    Oct 31 '18 at 18:58
2

One word: sales. A person who might need the money in 7 to 8 months might or might not purchase a CD from a banker. If the no surrender product is not available, then the transaction is customer versus banker in negotiation. That customer might opt to purchase elsewhere or not at all.

By offering the no surrender product the banker can change the transaction to banker and customer versus management. That customer is then likely to make that purchase and if they need the money come back into the bank to talk to the banker. Why do you need the money? Have you thought about a car loan instead? etc....

The 7 month CD serves as sort of a loss leader to generate other sales.

2
  • 1
    Not following. My point is that the 7 months CD is less great as a product than the 13 month CD, but the 13 month CD can be stopped after 7 months with a better rate.
    – brt
    Oct 31 '18 at 3:59
  • 3
    The 7 month product is designed to be a throw away product to increase sales of the 13 month product. By thinking they are getting a bargain, which they are likely not, customers will be more likely to buy from this bank. The better deal is to probably buy a 7 month CD online or from a brokerage. This tactic gives the customer the sense of shopping around although they didn't.
    – Pete B.
    Oct 31 '18 at 10:38

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