What is an add-on CD?


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An add-on certificate of deposit, or add-on CD, can be a great way to bolster your savings over time without taking on risk. These specialized CDs can also give you more flexibility than traditional CDs.

To find out whether an add-on CD is right for you, here’s everything you need to consider.

What is an add-on CD?

An add-on CD is a type of certificate of deposit offered by banks and credit unions to store your savings.

Generally, traditional CDs won’t let you add any more cash to the account after your initial deposit. At the end of the term, you will receive your initial deposit plus any interest accrued. Add-on CDs, meanwhile, let you make multiple deposits during the certificate’s term. The number of deposits you are allowed to make will vary based on the CD. But you will have the ability to add to your initial balance in some capacity.

Just like a traditional CD, you will be able to lock in a specific interest rate for the entire course of the add-on CD’s term. You will be able to keep this interest rate even if you add additional funds to the account.

[COMPARE: Best 1-year CD rates]

How add-on CDs work

When you open an add-on CD, the initial process will be very similar to opening a traditional CD: You will deposit a sum of money into the CD with the promise of a fixed interest rate for a set period of time.

After you make an initial deposit into an add-on CD, you will have more options than if you had put your money into a traditional CD. Instead of waiting until your CD’s maturity date to change the amount, you can add more money into the add-on CD at the same fixed interest rate.

It’s important to note that there may be some restrictions on how you add the additional funds. These may include: the total amount of cash you can add, the minimum amount of future deposits, the time period when you can make a deposit or the number of times you can make an additional deposit. Importantly, these additional deposits will be able to grow at the same fixed rate as your original deposit.

In a similar fashion to traditional CDs, you may have to pay a penalty if you choose to remove any funds early. Depending on the CD you choose, these fees can be fairly steep. The details of add-on CDs will vary based on your financial institution, so make sure to read the fine print before signing up.

Pros and cons of add-on CDs

Like all financial products, there are pros and cons that come with an add-on CD. Here are some important points you need to consider about add-on CDs.

Benefits of an add-on CD

As you continue to build your savings, an add-on CD offers an opportunity to lock in a fixed interest rate. You can continue to work on building your savings without worrying about whether the market will bring CD rates down — you’re guaranteed to earn interest at the predetermined rate.

“Investors benefit from add-on CDs if the going interest rates were to decline,” says Dr. Salvador Gonzalez, a faculty member in Walden University’s accounting program. “Add-on CDs also allow the investor to add more funds, increasing the investment at a fixed interest rate.”

If market rates for CDs were to drop, you could continue to add funds to your higher fixed interest rate. This feature makes an add-on CD more useful as part of a long-term strategy.

Drawbacks of an add-on CD

As with most CDs, you’ll have to to leave your money locked away for a specified period of time. This time period could range from a few months to a few years. In most cases, the longer term you choose, the higher interest rate you will receive.

Although this makes a long-term add-on CD seem attractive, it comes at a price. If you need to break open your CD before it matures, then you will be forced to pay a penalty.

“Generally speaking, the biggest drawback is that the funds are essentially locked into a term,” says Adam Marlowe, a principal experience officer at Georgia’s Own Credit Union. “While purchasers can get access to the funds in an emergency, usually there are significant penalties involved in closing a CD early. In some cases, the purchaser may forfeit all of the interest earned.”

With that in mind, it’s important to read the fine print of your add-on CD. Make sure you are comfortable with the term you are committing to before taking the plunge.

Where to open an add-on CD

Not all financial institutions that offer traditional CDs offer add-on CDs. A few options include add-on products from First Horizon Bank and Bank of the West. However, you should compare CD rates with multiple financial institutions before making a decision.

Make sure to read the fine print before choosing any CD. You will need to make sure that you’re comfortable with the terms before opening an add-on CD. After all, the funds will be locked in that CD for a set period of time. If you anticipate needing the funds before the maturity date, then consider other savings options, such as a high-yield savings account.

[COMPARE: Best 6-month CD rates]

Bottom line

Once you have some savings to tuck away, an add-on CD can be a practical place to store your funds. Not only will your initial savings grow, but you can add to your savings along the way.

However, it’s important to make sure that you won’t need to touch your savings for the duration of the CD’s term. It’s a good idea to have an emergency fund to avoid the need to take funds out of your CD early.

Check out our CD calculator to see exactly how much you stand to gain by stashing your savings in a CD.

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