CDs are time deposits, which means that when you purchase a CD from a bank, you are committing to allow it to earn interest for a certain period of time. The period of time which it takes for your CD to reach its maturity date is called a term, and that period could be anywhere from 6 months to even 10 years. Different types of CDs have different types of terms, and each type has its benefits and disadvantages.
CD terms can be divided into two broad general categories. The first is short term CDs, which would generally apply to CDs that have terms of one year or less for instance, a month, three months, or six months. Long Term CDs, for our intents and purposes, can be defined as CDs with a maturity period of longer than one year. CDs terms can vary quite broadly, but lets take a look at the advantages and disadvantages of short and long term CD terms.
Short term CDs those that reach maturity in a few months have the distinct advantage of not tying up your money for a very long time. If CD rates go up in a few months, for instance, you have the flexibility to move your nest egg into an account with a better interest rate. However, with short term CDs, you must pay attention and keep an eye on your maturity date. If you just allow it to roll over, you might get rolled into a much lower interest rate (going from 3.25% to .9% is not unheard of). If you are just going to leave the money there, a longer term CD might be for you, since those generally pay better interest rates.
Long term CDs allow you to lock in a good rate for a longer period of time. This is especially useful when interest rates are being cut, because no matter what the Feds do, your interest rate will remain the same over the term of your CD. So a long term CD allows you to accumulate interest at a predetermined rate over a longer period of time. They also tend to pay the best CD rates. However, there can be substantial prepayment penalties for withdrawing your CD early, so make sure you are able to part with that amount of cash for the term of the CD. Check out current CD Rates.