CD Terms and Conditions
The terms and conditions for certificates of deposit (CDs) vary between and within institutions. The institution selling the CD must make written terms and conditions available before the CD is purchased. These documents are legally binding and in the US they must also follow the guidelines of the federal Truth in Savings Act, which promotes full disclosure and consistency.
The following are the common terms and conditions that apply to CDs.
- Penalty for early withdrawal: These penalties may be calculated based on months of interest or some other formula. Some terms allow the principal to be reduced in the event of an early withdrawal.
- Interest calculation: A CD may begin earning interest immediately upon deposit or it may begin earning interest at the start of the next month or next quarter.
- Withdrawal of interest: Interest withdrawals may be limited to the interest earned in the preceding month or the terms may permit the withdrawal of accumulated interest since the opening of the CD. Interest withdrawals may be calculated to the end of the preceding month or to the date of withdrawal.
- Right to delay withdrawals: An institution will generally have the right to delay withdrawal for a specified period in order to prevent a bank run (everyone withdrawing at the same time, causing the institution to fail).
- Withdrawal of principal: In addition to fees for early withdrawal, there may be a minimum balance for the CD, requiring that the entire CD be closed if a portion of the principal is withdrawn.
- Automatic renewal: Some CDs will automatically renew at maturity as a new CD of the same term. Most financial institutions will commit to sending a notice before this occurs, but this is not necessarily the case.