cds

Can bank refuse early CD withdrawal?

Don TaylorQuestionDear Dr. Don,
On a recent CD I obtained, the bank inserted language that it does not have to permit an early withdrawal from this account. Can the bank refuse early withdrawal if I needed the money?
-- Arnold Accounts

AnswerDear Arnold,
It's like the prepayment penalty on a mortgage. If a homeowner accepts a prepayment penalty clause in their mortgage, he or she should be able to get a better rate on the loan, because the bank is getting compensated for the interest rate risk if the homeowner refinances the loan.

The bank has entered into a term deposit agreement with you. Aside from financial hardship, the most likely reason you would withdraw the funds is to reinvest them at a higher rate at another financial institution.

The bank would then have to find another depositor to invest and it would have to pay the new higher rates to attract that deposit.

By agreeing to the deposit term, with no early withdrawals allowed, you should have gotten a slightly higher CD rate because you accepted the interest rate risk.

Some banks offer loans that are collateralized by a CD held at that bank. If you did find yourself in a financial emergency, that could be a way of finessing the issue. Ask the bank whether it enforces the "no early withdrawal" provision and if the bank offers CD loans.

Bankrate's 2010 CD Study included a feature, "Survey: CD early withdrawal is costly," that provides more information on early withdrawal penalties. The time to question the terms of the deposit agreement is before you deposit the funds.

Ask the adviser

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.
 

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

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