Biggest Negative of Putting Money in a CD: What You Need to Know

People love the idea of a guaranteed rate from a CD, but there’s a catch that trips up almost everyone: once your money’s in, pulling it out isn’t as easy as dipping into your savings account. Need cash for a car repair, a job loss, or an unexpected bill? You could end up paying a painful penalty.

If you’re thinking about putting your savings into a CD, it’s crucial to know that early withdrawal can cost you months of interest, and sometimes even eat into your original deposit if the penalty is steep enough. These rules are strict for a reason—banks want your money to stay put, so they can lend it out elsewhere.

• What Happens When You Lock In a CD
• Early Withdrawal Penalties Explained
• Missing Out on Better Rates
• The Liquidity Trade-Off
• When a CD Might Make Sense
• Smarter Alternatives to Consider

What Happens When You Lock In a CD

When you put money into a certificate of deposit (CD), you agree to leave it with the bank for a set period—called the term. These terms can range from a few months to five years or longer. In return, you’re promised a fixed interest rate. This means the bank pays you the exact amount of interest no matter what happens with the overall economy or rates at other banks during your term.

The trade-off? Your cash is basically off-limits until the CD matures. It’s not like a savings account where you can dip in and out whenever you want. If you touch your money early, you’ll pay for it. Most banks have strict rules. Some will charge you around three to six months’ worth of interest for early withdrawals. On long-term CDs, that penalty can be even higher.

Here’s a quick breakdown of how common CD terms, rates, and penalties look in May 2025:

Some banks offer what’s called a ‘no-penalty CD,’ but these tend to come with lower rates than regular CDs. So while you’re getting a little flexibility, you’re also giving up some return.

One more thing: if you’re after safe, steady returns and don’t need the money soon, locking in a CD might make sense. But if life throws a curveball and you need fast cash, access won’t be on your side with a CD.

Early Withdrawal Penalties Explained

So let’s say you put your cash in a CD and life happens—a surprise dentist bill or a busted water heater. You want that money back early. Here’s where the trouble starts: almost every bank will hit you with an early withdrawal penalty if you take money out before the term ends.

What do these penalties look like? Usually, banks charge a set number of months' worth of interest as the penalty. For example, if you pull out money from a 1-year CD before it matures, you might lose three months’ worth of interest. Got a five-year CD? Some banks could take away six months' to a full year’s interest. And it’s not just lost interest—you don’t get that money back, even if you’ve already earned it.

Some banks are even stricter. If you withdraw super early, the penalty could be so big that you dip into your original deposit. That means you could actually end up with less money than you started with—not exactly the safe move most folks are expecting with a "guaranteed" savings product.

Banks put these rules in place to keep their own lending predictable. That’s why, before putting cash into a CD, it’s super important to check the specific penalty terms. Every bank and credit union sets their own rules, so don’t just assume it’s the same everywhere. Some penalty policies are basically hidden in fine print, so ask directly about them if you’re not sure.

If there’s any chance you’ll need that money, even in an emergency, think long and hard about whether a CD is the right place for your savings.

Missing Out on Better Rates

Here's a pain point that gets glossed over with CDs: you lock in your money and your interest rate. That can sting if rates start climbing after you put your cash in. You’re sitting with a 12-month CD at 4%, but then banks start offering 5% or more a few months later. There’s no easy way to switch out without paying penalties.

This rate risk is real. In fact, in 2022 and 2023, the Federal Reserve hiked rates ten times. Some folks who locked into CDs early on watched as new CDs shot up half a percent or more, leaving their earnings in the dust. Big banks aren’t shy about offering much higher rates as the market changes, but a CD means you’re stuck for the term—unless you’re okay with losing a chunk due to an early exit.

Check out how a rate change on a $10,000 CD could play out, just based on real numbers from recent years:

If you locked your cash at 0.15% early in 2022, that’s over $450 less than what you could've made at the peak of 2023. Stuff like this happens more often than folks think.

If you want wiggle room, look into short-term CDs or skip them altogether when rates are rising fast. Another move is to ladder your CDs—this spreads out maturity dates, so you’re not locked into one rate for your whole stash. Either way, don’t ignore the risk of missing out on better deals down the road.

The Liquidity Trade-Off

When you put money into a Certificate of Deposit (CD), you're making a deal with the bank: you get a fixed interest rate, but your cash stays locked up for a set period—say, six months, a year, or even five years. That means you can’t just move money in and out whenever you want, like you can with a savings account. This is the key trade-off, and it’s called liquidity. CDs aren’t very liquid. If life throws you a curveball, your hands are tied unless you’re willing to pay for that freedom.

In fact, a 2023 report from the FDIC showed that over 60% of CD holders kept their money locked for at least one year. During that time, if they needed emergency funds, they were hit with penalties ranging from 3 to 12 months’ worth of interest—ouch.

Here’s how the liquidity issue plays out in real life:

• You can’t use your CD savings for surprise expenses without penalty.
• If interest rates rise, you can’t quickly move your money to a better place.
• Unlike savings accounts, you can’t use your CD balance for day-to-day needs or fast transfers.

Take a look at how CDs stack up on liquidity compared to other accounts:

If you value easy and penalty-free access to your cash, a CD really isn’t designed for that. The whole point is that your money stays put. So before you lock in funds, ask yourself if you might need that cash in the next year. If you’re not sure, it might be smarter to keep most of your emergency savings in a regular account with zero strings attached.

When a CD Might Make Sense

Alright, so CDs aren’t perfect for every situation, but there are times when they fit right in. If you’ve got some cash you know you won’t need for a while—maybe you’re saving up for a down payment a year from now, or stashing tuition for next semester—a CD can give you a boost over a regular savings account. You just have to be sure you can lock it away for the whole term.

Right now, rates for CDs are actually looking pretty good. For example, as of spring 2025, some online banks are offering CD rates near 5.00% APY for a one-year CD. That’s way higher than most run-of-the-mill savings accounts, which are hanging around 1% to 2% APY.

"For folks who know they won’t touch the money for the length of the term, a CD could be a smart way to get a better return with relatively low risk," says Greg McBride, CFA and Chief Financial Analyst at Bankrate.

CDs make the most sense when you’re sure you won’t need that cash and you want a guaranteed rate, not a guess at what might happen next with the market. Some people even use CD ladders—a neat trick where you split your savings into multiple CDs with different maturity dates, so you have money coming back at regular intervals. That way, you get higher rates but keep some flexibility if you need it.

Here’s where a CD fits nicely:

• You’re saving for a goal at least a year away.
• You have a decent emergency fund already stashed somewhere else.
• You don’t mind saying goodbye to that money for a while in exchange for a better rate.
• You want something extremely low risk, like FDIC-insured CDs under $250,000 per depositor, per bank.

If you tick those boxes, parking your money in a CD could actually be a sharp move.

Smarter Alternatives to Consider

Stashing your cash in a CD isn't always the best move, especially if you value flexibility. Got your sights set on higher returns, quicker access, or fewer restrictions? There are some practical alternatives out there that won’t leave you stuck if you need money fast.

• High-yield savings accounts: These pay better interest than regular savings—sometimes even matching shorter-term CDs. The best part? Your cash stays easy to access, often with no monthly fees or withdrawal penalties. According to data from Bankrate, the average annual percentage yield (APY) for top high-yield savings was around 4.5% in April 2025.
• Money market accounts: Think of these as a mix between a savings and checking account. Typically, you’ll get higher rates than standard savings, along with check-writing and debit card access. Some even match or beat shorter-term CD rates for bigger balances.
• No-penalty CDs: These work a lot like traditional CDs, but you can withdraw your money without fees after a short lock-in period (usually seven days). Rates might be a tad lower than regular CDs, but you get way more flexibility.
• Laddering CDs: Spread your cash across multiple CDs with staggered terms. If you need money, at least one CD matures soon so you avoid big penalties. It’s a strategy that keeps your money working, but not completely locked up.

Here’s a quick look at how these options stack up:

You don’t have to take my word for it. As Greg McBride, chief financial analyst at Bankrate, put it:

"If ready access to funds is important to you, a high-yield savings account or money market account is usually the better choice than a CD."

The main thing? Don’t let the word “guaranteed” in a CD distract you from better answers to your savings goals. Weigh your need for flexibility, compare rates regularly, and don’t be afraid to switch if your current setup isn’t delivering. Your money should work for you, not just sit there locked up.