WHY THE BEST CD RATES ALWAYS PAY MORE THAN SAVINGS

One of the ways to invest money is to put it in a bank CD or savings account. With the economy in such bad shape and interest rates so low though, you might not really notice that CD's always pay more than your savings account at the bank. So, why are CD interest rates always higher than savings account rates? One of the ways a bank makes money is by loaning it to others. They take your money, give you a small interest rate, and then turn around and loan it to someone else at a higher rate. They make their money in the difference of what they are paying you for the money and what they are getting to loan it back out.

Banks get some of the money they have to loan from CD's or certificate of deposits. You can get a CD for different time periods such as 6 months, one year, two years, 5 years and up. When you buy a 2 year bank CD, the bank knows it has your money for two years. Likewise, it your get a CD for 5 years, they know they have 5 years to do whatever they want with your money. A bank is willing to reward you with the best CD rates if you are willing to loan them the money for longer periods of time.

Savings accounts are different from certificate of deposits and in many cases not much different than a checking account minus the checks. You put money in but you can take it out at any time with no penalty. Many people put money in and then take it out of their saving several times a month. That being said, the bank cannot loan the money out in savings accounts as easily because it is not locked in. For this, they are willing to give you some interest on your money but not near as much as with a CD because they have no guarantee you will not take the money out. That is why the best CD rates will always be found on the longest term CD's and saving accounts will never pay very much interest.