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Investing in a CD: Is an Online or Local Bank Better?

Online banks might offer higher CD rates, but you could find a better savings option for your needs with a small bank or nearby credit union.

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If you’re looking for the best place to stash your savings, you might have discovered online-only banks, which have higher rates and fewer fees than their big-bank competitors. With savings account rates currently above 4%, banks like Ally, Synchrony and Marcus by Goldman Sachs have been drawing in new customers.

Online banks are also popular for certificates of deposit, or CD accounts, another type of savings product that pays higher interest rates than your average checking account. In exchange for locking your money up for a set period of time, CDs are a low-risk way to get solid returns on your deposit. 

If you want familiarity, convenience and in-person service, you might prefer opening a CD account at your local bank or credit union. But will you get the best CD rates at the financial institution a few blocks away compared to online? 

Let’s walk through the pros and cons of local versus online banks. 

What are CDs?

A CD account is one of the safest places to store your money. Unlike a savings account, which has a variable rate, CDs have a fixed rate that you’ll earn for the full term. CDs come in a wide range of term lengths, typically ranging from just three months to five years. 

Banks and credit unions generally pay a higher annual percentage yield, or APY, for money in a CD because the account holder is agreeing to keep it there for a set term, during which the institution can loan out the cash and make more money. 

While online banks are well-known across the financial industry for paying significantly better yields, big banks tend to pay a pittance for CDs: Bank of America is currently paying just 0.03% APY for a 10-month CD, for example. 

Some CD offerings from smaller banks and local credit unions have competitive CD offerings. For example, consider the 5.75% APY on a nine-month CD (called a “share certificate”) at Andrews Federal Credit Union. While it’s only available to members in the Washington, DC, area, that rate is 0.5% higher than CNET’s picks for the best nationally available nine-month CD rates

Opening a CD at an online-only bank

When you open an account at an online-only bank, you won’t have access to a retail branch. These institutions are meant for tech-savvy customers who are comfortable without face-to-face interaction. There’ll usually be an option to call a customer service line, send an email or request help online. 

Though you sacrifice the ability to get help in person, you’ll gain some big benefits. Online-only banks tend to charge fewer fees, pay significantly higher interest rates and require lower minimum balances for accounts. (In some cases, no balance is required.)

Pros

  • Some of the highest rates available

  • Low or no minimum balance requirements

  • Easy online application process

Cons

  • No branch access

  • Impersonal customer service

Opening a CD at a local bank or credit union

Local banks and credit unions have significantly smaller physical footprints than nationally recognized names in the financial industry. Some may operate branches in a few towns or counties, while others might have a presence throughout a state. Doing business at a local bank or credit union is akin to shopping at a small grocery store versus shopping at Walmart.

Depending on the size of the local bank or credit union, you might not get the tech-savvy perks of bigger banks and online-only banks. But you could receive more personalized service and potentially higher interest rates.

Pros

  • Some offer flexible early-withdrawal policies

  • Some have competitive interest rates

  • Personalized service and branch assistance

Cons

  • May need to visit in person to open account

  • Limited availability

  • Credit unions have membership eligibility requirements

3 factors to consider when choosing a CD

Which APY is higher? The annual percentage yield is the most important factor when selecting a CD, since it shows your earning potential. 

Does one account offer more flexibility? If you’re looking for a no-penalty CD or one that gives you the flexibility to add funds down the road, you might be able to find these specialty CDs at online and local institutions. Since these aren’t as common, you’ll need to do some additional shopping around to find them.

What kind of customer service do you want? CDs generally don’t require a ton of interaction, but there is a difference between customer service at an online-only bank versus a local branch. If you want personalized advice, a local pick may be your best bet. If you want a speedy process, an online-only bank might be a better route.

Comparing CDs from online-only banks and local banks and credit unions

While online-only banks overall offer some of the highest CD rates, some local institutions offer competitive returns. Because each bank or credit union sets its own CD rates, there’s no universal answer as to which is better. 

Sometimes a local bank or credit union is a clear winner due to its perks. Consider Dow Credit Union in Midland, Michigan, which offers a member saveback reward for its CDs. In 2022, the bonus was 40%, so if you earned $500 in interest on your deposit, you would score an additional $200.

While online-only banks usually offer a couple of CD options – traditional and no-penalty, for example – some local institutions offer even more options, according to Jason Rogers, senior vice president at Mountain America Credit Union. For example, Mountain America, which has more than 100 branches across Utah and other Western states, offers a flexible growth certificate account: With a current APY of 5.25% for its 12-month option, a customer can open one with just $5 and make deposits up to $100,000. 

Moreover, some local banks and credit unions offer more flexible withdrawal policies in the event that you require access to the money in your CD earlier than anticipated. “If you need funds prior to the maturity date, a local institution may allow you to borrow against the certificate, helping you to avoid the early withdrawal penalty,” Rogers says. 

Take Bellco Credit Union, which operates 28 branches in Colorado. If you withdraw early from a two-year CD, it charges 90 days’ worth of interest on the amount of the withdrawal. That’s half the cost of the penalty at online-only Synchrony, which charges 180 days’ worth of interest for withdrawing early from a two-year CD.

The bottom line

Banks and credit unions have increased their saving rates over the past year, which makes it a good time to invest in a CD. Online-only CDs are convenient and have some of the highest rates, but there could be a better deal at a local bank or credit union. When you open a CD, you’ll be locking up your money for a while, so do your research and compare multiple offers before you make a decision.

David McMillin writes about credit cards, mortgages, banking, taxes and travel. Based in Chicago, he writes with one objective in mind: Help readers figure out how to save more and stress less. He is also a musician, which means he has spent a lot of time worrying about money. He applies the lessons he's learned from that financial balancing act to offer practical advice for personal spending decisions.
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