The deal: A bank certificate of deposit, or CD, delivers a fixed interest rate on your FDIC-insured principal deposit.
The risk: Banks charge early withdrawal penalties.
Failing to understand your near-term financial needs can cost you, according to Bankrate's 2010 CD Early Withdrawal Penalty Study. As much as 92 percent of banks surveyed use part of the account's principal for early withdrawal penalties. Some also charge a percentage of the CD value.
The reward: Longer terms equal higher interest rates.
CDs are available in term periods of three months to five years with interest rates as high as 2.71 percent for five-year CDs. Customers concerned with withdrawal penalties might look at Ally Bank's 11-month No Penalty CD, which has a 1.32 percent APY.
"We wanted to make sure that the customer doesn't have to jump through hoops when he needs the money," says Ally spokeswoman Beth Coggins.
While some banks offer no-penalty programs, Bankrate Senior Financial Analyst Greg McBride, CFA, warns these rates may be sharply lower than traditional CDs.
"Make sure you're not giving up too much on the front end just to have the option of raising the rate," McBride says.
Use Bankrate's CD comparison tool to find the best CD rates.