Short-Term CD Rates vs. Long-Term CD Rates: Which is Better? (2024)

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• Short-term CDs have high interest rates right now — the best CDs offer around 5.00% APY.
• Short-term CD rates are more competitive than long-term ones because there's an inverted yield curve.
• You might still prefer a long-term CD if you want to lock in a rate for a few years because savings rates are good overall.

Usually, long-term CDs pay higher interest rates than short-term ones. However, if you look at the best CD rates right now, you'll find 3-month, 6-month, and 1-year terms are actually more competitive than some longer-term CD rates.

Why is that? We'll explain how it works, and how to decide if a long-term or short-term fixed-interest account is a better option.

What are short-term CDs?

A short-term CD is any CD with a maturity date of a year or less. Examples of short-term CDs include 3-month, 6-month, 9-month, and 12-month terms.

Long-term CDs refer to CDs with a maturity date longer than one year. Most financial institutions offer at least 2-year, 3-year, and 5-year terms. You might find terms as long as 10 years at select banks.

Why are short-term CD rates so high?

Alvin Carlos, CFA, CFP, financial planner and managing director of District Capital Management, explains that short-term CDs have high rates due to the current economic environment.

Banks are paying lower interest rates on long-term CDs because they expect the Federal Reserve to cut rates in the future, which would also cause bank account interest rates to drop. To still provide competitive offerings, though, banks are offering high interest rates on short-term CDs.

Short-term CDs vs. long-term CDs: Which should you choose?

Below, we've outlined the pros and cons of short-term and long-term CDs. Then, a financial expert provides tips and insight on how to choose the right CD term.

Short-term CDs vs. long-term CDs: Pros and cons

Short-term CDs

Pro: More accessibility than long-term CDs

Short-term CDs offer more accessibility than long-term CDs because you're only locking in money for a year or less. That may be beneficial if you think you need to withdraw money sooner rather than later.

Con: Need to be more mindful of current economic conditions

If you open a short-term CD, you'll have to deal with more frequent CD rate fluctuations. To stay on top of competitive offerings, you'll also need to pay closer attention to the economic market and current CD rates.

For example, let's say you opened a 6-month CD. You'll only maintain a fixed interest rate for six months. At maturity, the new renewal rate offered could be different. Meanwhile, someone who opened a 5-year CD will keep a fixed interest rate for five years and won't need to worry about any CD rate fluctuations during that time.

Long-term CDs

Pro: Fixed interest rate for over a year

One benefit to opening a long-term CD is that you'll have a fixed interest rate for a longer timeframe than a short-term CD. This means you'll earn more interest on your account because you'll have it locked in longer. You also won't have to worry as much about CD rate fluctuations.

Con: Early withdrawal penalties for long-term CDs are significant

Long-term CDs generally have higher early withdrawal penalties than short-term CDs. You'll also have less account flexibility because you'll have to wait a longer timeframe before your account reaches maturity.

Choosing the right CD term

While short-term CDs may offer better interest rates than long-term ones, you don't want to choose a term solely based on its rate. Instead, Carlos suggests thinking about whether you have a specific use for your money and matching your need with a certain term.

"Let's say I need to buy a car in six months — then I would buy a 6-month CD. If I need the money for a down payment for one year from now, I would buy a 1-year CD. You're buying a CD term that matches your need, so you're not out there trying to guess what's right for you," says Carlos.

Are you saving for a goal in the next three to five years? Carlos says it's still worth getting these longer-term CDs because rates are generally good overall.

If you are using CDs for excess cash and don't have a specific goal, Carlos generally recommends setting up a CD ladder. This allows you to diversify your CDs and have more flexibility in case you need to withdraw money at any point. With this savings strategy, you'll open multiple CDs with different terms and deposit your savings across these accounts.

How to choose the best short-term CD rates

If you are looking for a CD term under two years, these accounts are featured in our guides for best 3-month, 6-month, and 1-year CD rates:

• EagleBank 12 Month CD: 5.11% APY
• EagleBank 6 Month CD: 5.00% APY
• Bask Bank 6 Month CD: 5.00% APY
• America First Credit Union 3 Month Certificate: 5.20% APY

How to choose the best long-term CD rates

If you would rather open a long-term CD, these accounts also offer generally good rates:

• USALLIANCE Financial 2 Year Certificate: 5.00% APY
• Lafayette Federal Credit Union 2 Year Certificate: 4.78% APY
• BMO Alto 5 Year High Yield CD: 4.10% APY

The financial institutions listed above are all federally insured by FDIC or NCUA. The FDIC protects consumers if a bank fails. The NCUA manages credit unions and protects credit union members if an institution shuts down. Up to $250,000 per depositor is secure in a bank account that's federally insured by the FDIC or NCUA.

Short term vs. long term CD FAQs