What Is an Add-On Certificate of Deposit?

what is an add on certificate of deposit

When comparing different types of CDs, you might wonder what is an add-on certificate of deposit? An add-on CD gives you more flexibility than a traditional CD. This option might appeal to you if you want to be able to add money to your CD after you first open it. But before moving forward with this kind of CD account, it is important to fully understand the product.

What Is an Add-On Certificate of Deposit?

An add-on CD allows you to continue to make deposits to a certificate of deposit after you initially open the account. Most CDs just allow you to open the account with an initial balance, which you leave alone until your account matures. In comparison, some add-on CDs will allow you to make as many additional deposits as you want throughout the life of the CD, while others limit the number of deposits you can make to the account.

Like a traditional CD, you will lock in the interest rate on the account for the entire length of the CD. Your CD will mature at the end of its term and then you’ll have the option to renew it or withdraw. If you need to withdraw money early, you might face early withdrawal penalties, such as forfeiting all or part of the interest earned on the account.

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Pros of an Add-On CD

An add-on certificate of deposit has several benefits — the biggest being that you can continue to add money to the account. This can be appealing if you are working toward a specific savings goal, like a down payment for a home, and know that you’ll want to grow your balance to achieve more interest on your savings.

Add-on CDs allow you to add the extra money to the account as you get it, preventing you from spending it in a pinch. Currently, CD rates are slightly higher than those of traditional savings accounts and some money market accounts, which means you can lock in a higher rate than what you would traditionally earn at the bank.

Cons of an Add-On CD

One of the biggest disadvantages of a CD is that it ties your money up for the term of the certificate. Although you can withdraw at anytime, you might lose all of the interest you earned on the CD, and possibly risk the principal if you haven’t earned much interest.

Many people avoid putting money into CDs if they know they will need access to their money shortly. Another downside is that you lock in the interest rate on the CD for the entire length of the term, so when interest rates are low, you might not be able to change the amount you earn as rates go up.

Choosing an Add-On Certificate of Deposit

When looking for any certificate of deposit, you need to carefully consider several factors, including the term of the CD. This is the length of time you want the CD account to remain active. The CD term you choose should align with your savings goals.

Additionally, you will also want to consider current CD rates. Every financial institution offers slightly different rates, and you might be able to earn higher interest rates by shopping around or using an online bank. Add-on certificates of deposit are a great way to continue feeding your long-term savings goals, but it’s wise to be realistic when it comes to how soon you’ll need to access the funds.

Photo credit: Gerard Van der Leun

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About the Author

Miriam Caldwell

Miriam Caldwell is a North Carolina-based writer specializing in personal finances.  Miriam has written about everything from budgeting to managing your money while married. With more than 12 years of experience, her writing as appeared online at TheBalance.com, About.com, and BlissfullyDomestic.com.

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