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What's the Difference: Short Term vs. Long Term CDs

Certificates of deposit (CDs) are savings products that pay interest on a deposit for a specified length of time. Depositors leave the money untouched until the maturity date, at which point they can access the funds and the interest. CDs generally provide higher interest rates than traditional savings accounts.

While both short-term and long-term CDs provide opportunities to earn interest, they differ in how quickly you can access your money. Knowing the key differences can help you choose the right CD for your situation.

How do CDs work?

When you open a certificate of deposit, you deposit a certain amount of money for a specific length of time, known as the CD term. During this time, your money generally earns a fixed interest rate, although there are variable-rate CDs. With fixed-rate CDs, the rate remains unchanged regardless of fluctuations in market rates. The interest earned is typically compounded — meaning interest accrues on the initial deposit as well as previously earned interest — maximizing your return.

The maturity date marks the end of the CD term. When the CD matures, you can exercise options such as renewing the CD or taking your initial deposit along with the interest earned. Some savers use a CD ladder strategy, dividing their funds among multiple CDs with staggered maturity dates to provide ongoing access to funds while still taking advantage of interest rates.

Withdrawing money before the maturity date may incur a penalty, depending on the type of CD account, reducing the overall interest earned. Therefore, choosing the right CD based on your needs is important to balancing risk, liquidity, and return.

What is a short-term CD?

A short-term CD refers to a certificate of deposit with a term length of less than one year. Terms typically vary from 3 months to 12 months. This type of CD might be a good option for those who want to lock in an interest rate but still want to have access to their money relatively quickly.

Short-term CDs appeal to individuals who anticipate needing their funds soon, expect interest rates to increase in the near future, or have concerns about paying penalties for early withdrawals. Once the CD matures, the principal and interest earned can be withdrawn without penalty.

Benefits of a short-term CD

  1. Liquidity. Short-term CDs allow for faster access to your money, reducing the chance you’ll need to make an early withdrawal

  2. Flexibility. With shorter terms, you can take advantage of changing interest rates, moving your funds more frequently if the rates improve

  3. Potential for higher returns than traditional savings accounts. Short-term CDs might provide better returns than savings accounts, which can make them a good option for short-term goals

What is a long-term CD?

A long-term CD typically has a term length of 3 years or more. Because your money remains locked in for an extended period, these CDs might offer higher interest rates than short-term options, allowing you to earn more interest over time. A fixed rate would mean you'll earn the same return even if the market interest rates fluctuate during the term.

Long-term CDs may be a good option for individuals with long-term savings goals — such as saving for a future large expense — who don’t need immediate access to their funds. Early withdrawal penalties may apply if you need to access your savings before the maturity date, however some CDs offer the option of an early withdrawal of some of the money.

Benefits of a long-term CD

  1. Potential for higher interest rates. Longer-term CDs might offer higher interest rates than short-term CDs

  2. Fixed interest rates. Some CDs offer a fixed interest rate meaning the interest rate remains constant throughout the term. This can help provide stability against potential market volatility

Choosing a CD term

To maximize the benefits of your CDs, it helps to consider them in the context of your overall savings strategy. Here are some key factors to consider when deciding between a short-term CD and a long-term CD:

  1. Choose one based on your savings goals. The first step is to define your goals. Are you saving for a short-term objective, such as a vacation or a down payment on a house? If so, a short-term CD may be more appropriate, as it allows you to access your funds sooner. Conversely, if you’re saving for a long-term goal, like funding a child’s education, a long-term CD might provide higher interest rates

  2. Determine how long you're comfortable not using that money you put aside. It's important to assess your liquidity needs. How long can you afford to have your money locked away? If you're OK with not accessing your funds for an extended period, a long-term CD may be beneficial. However, if you are concerned that you might need access to your savings for unexpected expenses, a short-term CD would provide greater flexibility without the risk of incurring penalties for early withdrawal

    By weighing these factors carefully, you can make an informed decision about the CD term that best suits your needs. Whether you opt for a short-term CD or a long-term CD, understanding your choice can help you maximize the interest earned

  1. How soon do you want your return? Timing is important. If you anticipate needing your money within the next year, a short-term CD offers a quicker path to accessing your funds once it matures. On the other hand, if you can commit to not using the funds for a year or more, a long-term CD might offer higher interest rates over an extended period

  2. Are you looking to access funds quickly or keep a fixed rate for the long term? If you think interest rates may rise in the near future, you might prefer a short-term CD, which allows you to access funds to potentially take advantage of better rates. This strategy can be beneficial if you're concerned about missing out on higher returns. Conversely, if you think rates will drop, a long-term CD could lock in a higher rate for an extended period. It might also be a good choice if you want the certainty of a fixed interest rate for an extended period

CDs from TD Bank

This article is for general informational purposes only. It is not intended to provide specific financial, investment, tax, legal, accounting, or other advice and should not be acted or relied upon without the advice of a professional advisor. A professional advisor will recommend action based on your personal circumstances and the most recent information available.

1Partial and full withdrawals may be made without penalty during a ten (10) day grace period that begins on the maturity date.

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