Why early withdrawal terms aren’t important to me

Benjamin Franklin's face on $100 bill

I once thought early withdrawal terms were critical in selecting a CD.

I particularly abhorred deposit contracts requiring prior bank consent to early withdrawal or imposing substantial nonstandard early withdrawal penalties.

Like OneWest Bank’s contract.

It not only reserves a veto right over early withdrawals but provides for a potentially crushing "market adjustment" penalty for closing a CD with a term of more than two years, based on the bank’s cost of arranging for a "replacement CD."

But, as CD rates have plummeted, my thinking on this subject (like most of my thinking on CDs) has evolved.

Early withdrawal terms like at Southern California's OneWest no longer bother me.

Here’s my current thinking:

Because I view a CD as a loan to a financial institution for a stated period of time in exchange for an agreed-upon payment of interest, onerous restrictions on when I can remove my money aren’t necessarily unfair or unreasonable.

A "lender" (depositor) can only expect to be given a right to terminate a "loan" (CD) if there’s a default by the "borrower" (bank).

He or she shouldn’t be allowed to cut and run just because higher interest rates make the transaction uneconomical.

And with CDs, contractual protections against default aren’t necessary, because you have government insurance.

Maybe I’m simply rationalizing here -- justifying my failure to adhere to principles I once embraced. That’s not surprising: I’m a retired lawyer.

I still eyeball these terms in CDs of more than 36 months.

(There’s no magic to that number. It’s just that I don’t think I’ll feel foolish if I find myself stuck in a low-rate CD for that limited a period.)

With 4- or 5-year maturities, I try to avoid CDs I can’t terminate early without prior bank consent.

I have, however, opened such CDs where the rate seemed compelling.

And I try to stick to plain vanilla penalties, like 6- or 9-months’ interest.

But, here again, I’ve slipped up.

Of course, like everyone else, I appreciate Ally Bank’s tiny 60-days’ interest penalty.

I have four Ally 4-year Raise Your Rate CDs and one 5-year CD.

But I opened them because their rates (and bump-up features) were favorable, not because of the low penalty. I don’t focus on "yield-to-early-closure" calculations as some do.

Besides, under deposit contract terms and the Truth in Savings Act, Ally (and pretty much any institution) can raise penalties on me any time, with prior notice.

Then I would feel foolish, if I’d actually relied on them.

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