Ally Bank CD rates illogical ?

[NameRedacted]

I'm not sure I understand the logic behind how they set the yields on their CDs.

Here are the rates that Ally Bank are currently offering

Savings 1.05%

3 month - $5000 0.30%, $5000-25000 0.34%, $25,000+ 0.39%
6 month - $5000 0.60%, $5000-25000 0.63%, $25,000+ 0.67%
9 month - $5000 1.00%, $5000-25000 1.05%, $25,000+ 1.15%
12 month - 1.35% everything
18 month - $5000 1.20%, $5000-25000 1.25%, $25,000+ 1.35%
36 month - $5000 1.50%, $5000-25000 1.55%, $25,000+ 1.60%
60 month - 2.25% everything

These have the following penalties for early withdrawal: -

CD term 24 months or less - 60 days of interest
CD term 25 - 36 months - 90 days of interest
CD term 37 - 48 months - 120 days of interest
CD term 49 months - 150 days of interest

Plus they have an 11 month no penalty CD as follows:

11 month - $5000 0.90%, $5000-25000 1.00%, $25,000+ 1.10%

They also offer a couple of raise you rate CDs which I left out of this analysis.

So, first of all the 3 and 6 month CDs seem pointless. Why not just put the money in the Savings account and get a much better rate and better flexibilty? Unless you seriously think that savings rates are going to fall dramatically over the next 3-6 months. Similarly, why would anyone go for the 18 month CD when the 12 month CD offers the same or a better rate?

The 9 month CD offers slightly better rates than savings if you have at least $25,000 but you would have to hold it for the full 9 months and the difference in interest is about $6 which seems not very much considering all the flexibility you lose.

Now here is where it gets interesting. The savings rate is 1.05%. The 11 month no penalty CD is 1.10% on $25,000. The difference in interest there is $3. So you could open an 11 month CD and get an ever so slightly better rate than savings and if you ever need any of the money just close out the CD and deposit the balance in savings or open a new CD. The delta is so close though that I would probably go with savings just to save having to close and re-open accounts.

Now let's look at some of the longer term CDs. The 5 year CD offers 2.25% and has a 5 month penalty. If you held that for a year and then closed it out you'd get around 1.32% which is almost the rate the one year CD pays. The similar calculation for the 3 year CD is 1.20%. The cross over point at which the 5 year CD yields more than the 3 year CD is around 10 months at a rate of about 0.93% - annualized to 1.12%. So the 3 year CD is only better than the 5 year if you hold it less than 10 months but the rate you get by doing that is only slightly more than you would get in savings. So there is not much point buying the 3 year CD unless you intend to hold for about 9-10 months.

So it looks like the best options are either savings/11 month no penalty CD for short term holdings up to 9 months, 3 year CD for 9-10 months, 12 month CD for exactly a 12 month term and the 5 year CD for anything beyond that.

Of course what if the savings rate increases? Well as long as it doesn't hit more than 1.32% in the next twelve months the 5 year CD is going to yield a better return for anything around 10 months or longer. If after 12 months the savings rate (or CD rates) increase dramatically simply break the CD, take the penalty, reinvest and you still come out ahead.

 

[Texas Proud]

Most people do not shop for rates... they put money in for some time period...


Also remember that banks set rates to encourage or discourage people making deposits for the listed time period.... IOW, if they do not want to have 3 or 6 month CDs, offer low rates and nobody will take it unless they do not look...

 

[brewer12345]

Most people do not shop for rates... they put money in for some time period...


Also remember that banks set rates to encourage or discourage people making deposits for the listed time period.... IOW, if they do not want to have 3 or 6 month CDs, offer low rates and nobody will take it unless they do not look...

Yup. Plus many people set their CDs on auto-reenroll at maturity. So you keep the "regular" rates low and bring in new money with goofy periods like 11 months.

 

[samclem]

I think there's also a special wrinkle to watch for with Ally. They offer 24 and 48 month "raise your rate" CDs. If their rate for that product goes up, existing holders can bump up their rate to the new one (for a limited number of times). Now, I suspect these were fairly popular, and Ally has a big slug of deposits in them. The cynic in me says they'll be very reluctant to raise rates on those products and give all the existing account holders a way to get higher rates. Instead, they'll launch new "Raise Your Rate" CDs with terms slightly different than 24 and 48 months, and those CDs will carry the higher rate to attract new deposits. Existing holders of the 24 and 48 month RYR CDs will be SOL.

 

[audreyh1]

Remember that Savings can change the rate at any time, whereas CDs are locked in for the duration.

But this is more an issue when interest rates are dropping, rather than rising. Lots of short term CDs paying less than savings, so I ignore them.

 

[NameRedacted]

Yep - they have a 2 year 'raise your rate' and a 4 year 'raise your rate' both offering 1.50%. The 2 year looks good compared to the standard 3 year at 1.60% but the 4 year doesn't look that great compared to the 5 year at 2.25%.

I'd still prefer the 5 year for anything over 12 months.

 

[jazz4cash]

I agree it isn't logical on many points. Also they have moneymarket account that pays 85 bps vs 105 for online savings. What's the point of that? It's not just Ally with goofy rates and terms. I'm opening an account with them now (if NFCU will ever release my IRA funds).