A callable CD is a certificate of deposit that pays interest like a regular CD, but can be “called” or redeemed by the issuing bank before the maturity date, limiting the return for the investor.
Regular CDs are designed so that investors get back their principal, plus a fixed amount of interest, when the CD matures. But those who own callable CDs may not get the interest they expected if the bank calls the CD early.
Callable CD interest rates tend to be higher because of this potential risk.
What Is a Callable CD?
A callable CD, like a callable bond, means that the bank has the power to terminate the CD before the maturity date. This may happen if there is a drop in interest rates.
For example, if an investor opens a bank account and buys a 2-year callable CD, the bank could close it out as soon as six months after it’s opened, or any time after that, generally at six-month intervals; it depends on the terms of the CD. The investor would then get back their principal and the amount of interest earned up to that point.
It’s important to note that only the issuer has the ability to call the CD early. The investor must leave their money in the CD until it’s called or reaches maturity, or they will likely face an early withdrawal penalty.
Get up to $300 when you bank with SoFi.
No account or overdraft fees. No minimum balance.
Up to 4.20% APY on savings balances.
Up to 2-day-early paycheck.
Up to $2M of additional FDIC insurance.
How Does a Callable CD Work?
Callable CDs are similar to regular CDs, which are time-deposit accounts offered by banks, credit unions, and brokerages. These accounts provide a fixed interest rate on the funds the account holder has deposited for a specific term (usually a few months to a few years).
Callable CDs generally offer higher interest rates. But unlike a regular CD, a callable CD has a “call” feature which allows the financial institution to decide whether it wants to stop paying the account holder the higher interest rate. This typically occurs when interest rates begin to drop. At that point, the issuer can close out the CD and return the funds to the investor, plus any interest earned up to that point.
The bank typically offers a premium interest rate to account holders in exchange for the risk that the CD might be called.
Recommended: APY vs. Interest Rate: What’s the Difference?
Callable CD Example
Let’s say an account holder decides to deposit $10,000 into a callable CD that has a three-year maturity with a 5.00% interest rate. The bank, however, decides to call the CD after a year because interest rates dropped, and the bank can now offer CDs at a 4.00% interest rate.
In this case, the account holder would get their $10,000 back along with the interest accrued prior to the bank’s redemption of the CD. That would be about $500 versus more than $1,500 the investor might have earned if they had been able to hold the CD to maturity.
Are Callable CDs FDIC Insured?
Callable CDs, like most types of CDs, are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA) if the CD is issued by a credit union. If there is a bank failure, federal deposit insurance protects the money held in a callable CD up to that amount.
If the CD was issued by a brokerage, which is generally known as a brokered CD, the CD is not technically FDIC-insured. However, the brokerage’s underlying purchase of the CD from a bank typically is FDIC-insured (though it’s a good idea to check to make sure before you open a brokered CD).
Maturity Date vs Callable Date
The maturity date is when the certificate of deposit reaches maturity and the investor can redeem the CD for the principal plus interest accrued during the length of the CD. They can choose to take the earnings or renew the CD.
The callable date is the earliest date at which the CD issuer can close the CD. The first callable date can generally be as soon as six months after the CD was opened, and can typically occur any time after that, at six-month intervals (for example, one year, 18 months, two years, and so on).
Be sure to read the terms of any CD, but especially callable CDs, as the callable date can vary. For example, you could buy a callable CD with a 5-year maturity date and a one-year callable date (the earliest date the issuer can call the CD). That means, at the very least, your money would earn a year’s worth of interest.
Pros of Callable CDs
There are several advantages that may come with opening a callable CD.
• Callable CDs typically pay higher interest rates compared to regular CDs. Since account holders are taking on the risk of the bank redeeming the callable CD prior to its maturity, the account holder gets a higher interest rate in exchange for taking on this risk.
• Like most CDs, callable CDs are generally considered lower-risk investments. If the bank decides to terminate the CD before its term, you will typically still receive the original deposit amount as well as the interest that accumulated until that time.
• In the event of a bank failure, your money is federally insured up to $250,000.
Cons of Callable CDs
While there are positives to callable CDs, these saving vehicles can have some downsides.
• If the account holder needs access to capital and has to withdraw their money prior to the callable CD’s date of maturity, they are subject to early withdrawal penalties which can eat up some or all of the interest earned.
• In the event that interest rates decline, there is a possibility that the bank could call the CD early, in which case the account holder would not receive the same return they would have if the callable CD were to finish its full term.
Where to Open a Callable CD
You can open a callable CD with a bank or credit union, or with some brokerages. The financial institution should be FDIC-insured or National Credit Union Administration-insured so your money is protected.
With a brokered CD, the CD should be insured through the bank the brokerage purchased the CD from, but be sure to check that this is the case before opening the CD.
The Takeaway
If you are looking for investments that are generally lower risk, provide predictable returns, and are protected by federal insurance, callable certificates of deposits might fit the bill. Callable CDs could build your savings by paying a higher fixed interest rate for a specific period of time. However, the account holder takes the risk that the bank might exercise the call option, and close the account before the CD matures.
If you’re interested in earning a higher rate on your savings, you may want to consider other savings vehicles as well, such as a high-yield savings account with a competitive APY that’s higher than the rate offered by traditional savings accounts. Explore the options to choose what best suits your needs.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
What is a callable vs a non-callable CD?
Callable CDs are certificates of deposits that pay interest for a specified term like a traditional CD does, but the callable CD rate tends to be higher because the bank can redeem the CD before it reaches maturity. A regular CD does not have a call feature.
Why would a bank call a CD?
Usually, a bank would call a CD in the event of falling interest rates. The bank redeems the CD because with a drop in rates, it can then pay lower rates to its CD holders.
Can you lose money on a callable CD?
Generally, you cannot lose money on a callable CD, but you might get less of a return than you’d hoped. In the event that the CD is called, the account holder receives the principal along with interest that was accumulated up to that point in time, instead of receiving the return for the full term of the CD.
Photo credit: iStock/hallojulie
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
4.20% APY
SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.
SOBK-Q224-1916985-V1