Ally Bank 5-Year Certificate of Deposit: A Closer Look

Previously, I wrote about Ally Bank CDs and how they offer flexibility in the case of rising interest rates. I finally found the time to do the analysis of the 5-year CD that I wanted to do. In particular, I felt that the current yield curve and short 60-day early withdrawal penalty make this certificate of deposit very attractive.

The current Ally Bank 5-year CD yields 1.60% APY (as of 10/25/13). Rates change constantly, but let’s assume you have a certificate of deposit from any bank paying 3.09% APY with an early withdrawal penalty of the last 60 days of interest. (3.09% APY = 3.04% rate compounded daily.) Here’s how your actual annualized interest rate would fluctuate given your holding period.

Some very interesting realizations come out of this:

    • After only 4 months, your annualized rate is 1.52%. (Essentially you 2 months out of 4, which is half of 3.04%). This isn’t bad at all, considering their liquid online savings account is currently paying 0.85% APY (as of 11/12/13).
    • After 1 year, your annualized rate is 2.57%. The current 1-year CD is currently paying 0.98% APY(as of 10/25/13). I can’t find any bank with a 1-year CD paying anywhere close to 2.57% APY. Try to find one!
  • After 2 years, your annualized rate is 2.83%. Ally’s current 2-year CD is currently paying 1.05% APY(as of 10/25/13), although it does have a Raise Your Rate feature.
  • After 3 years, your annualized rate is 2.91%. The current 3-year CD is currently paying 1.20% APY(as of 10/25/13). At this point, a few banks offer a similar rate, but this is still amongst the top. The only better one I could find was PenFed which was slightly better at 3.00% APY.

 

Final benefit: No minimum opening balance!
As icing on the cake, you can buy these CDs in increments of as little as $1. Now, I wouldn’t abuse their policy, if only to avoid the trouble of keeping track of them all. But let’s say you have $50,000 to put aside. You could buy five $10,000 CDs, and so if you must make a withdrawal of $10,000 you’ll just “break” one CD and have the other four intact. For more modest total amounts, you could go into smaller increments, for example at $1,000 a piece.

Comments

  1. Ally Bank short term deposit has been the talk of the PF blogs, but one thing consistently left out is the fact that they can change the deposit terms any time and they can choose not to honor your request to close a CD.

  2. I want to see the worst case scenario – when Ally changes the penalty back to 180-day…

  3. If you read the Ally Bank Deposit Agreement you see there is nothing about them being able to deny your request to close.

    Early Withdrawals — If you need your funds prior to the end of the term, there is a penalty. All CDs will be assessed a 60-day interest penalty. The exception to this limitation is the Ally No Penalty CD.

    Sure they could change the Deposit Agreement, but at that point you would be able to get out of your CD’s before the new terms take place.

  4. Does anyone have 1st hand experience with early withdrawing Ally CD’s? How smooth is it? I heard Ally gave some ppl really hard time transferring the fund.

  5. Regarding the possibility that Ally could increase the early withdrawal penalty on existing CDs, there have been conflicting reports from Ally CSRs regarding this possibility. I recently contacted Ally’s Director of Public Relations. He looked into this issue and has informed me of the following: “your readers can rest assured that the terms under which they purchased their CDs will be honored through maturity.” You should be able to receive confirmation of this directly from the Ally CSRs now.

  6. Just to clarify, the “raise your rate” applies to a singe 2-year CD, not to the 5 year CD we’re talking about here.

    Jonathan’s idea of splitting a large sum in to smaller CD’s seems like a great one.

    I am also quite interested in the story behind “changing the deposit terms at any time”… How can they do that? Isn’t it a legal contract? Same question about “giving a hard time” whey withdrawing. How can they do that? Or is it just a matter of some verbal arm-twisting when talking to their reps?

  7. Hmmmmm……sounds quite interesting. I’ve got too much idle cash sitting in ally’s osa and 1.29% is damn near tear-jerking.

    There’s still that funny stomach-tingling idea that you’re buying a “FIVE” year CD, but I guess the math makes more sense than making less money at 1.29% for no good reason at all, considering their rules.
    :)

  8. How often do you get paid your interest? Is it only at the end of the CD term? In otherw ords, would I only get it at the end of 5 years?

    Is there any kind of signup bonus for Ally Bank?

  9. I’ve had nothing but good experiences with Ally (formally GMAC). Online savings have been what they promised. The website is above average (I have 5 different online banks). I purchased two no penalty (9 month) CD’s last year and had to cash one in early due to an auto accident. Customer service was friendly, quick, and efficient. The cash was in my b&m checking in two days (with no fees whatsoever). I have credit union CD’s coming due in June. Ally’s rates are equivalent, but the penalties are soooooo much better! They will get my cash!

  10. Ally is really doing a great job. I have decided to ladder 5 year CDs with them monthly. I will be doing $1000 each monthly over the next 5 months. Has anyone done laddering? Did it go well?

  11. Mike – I have a few CD’s at Ally. You can sign up to get your interest monthly or at the end of the term.

  12. With all the excitement over using the 5-year CD as an alternative to a savings account, isn’t it just a matter of time before they either increase the penalty (say, to 6 months) or reduce the rate? I guess this is a reason to open the CDs now, which is exactly what I have done with a big chunk of my cash.

  13. I have had many CD’s with Ally. I’ve closed several of them early (No Penatly CDs) with no problems from customer service. So far my experiences with them have been great. They even offer a checking account now that pays interest.

  14. I’ve heard elsewhere (fatwallet) that Ally offers a rate bonus for current CD customers that renew their CD. The bonus is either .25% or .5%. They seem to offer different people different amounts. I did see someone who was offered .25% post that they asked for and got a .5% increase. I have a 1-year CD maturing in May that I would like to add to and split into several smaller CDs. I’m going to see in Ally will let me do this and give me the .5% bonus. We’ll see!

  15. Hey Jonathan. Out of curiosity, how did you calculate the resulting rates? I’m not getting the same values. For example, for the 2 year term you calculated that as 2.83%, however I got 2.7901%. It’s a small difference, but it’s driving me nuts that I can’t figure out how you arrived at your figures! Thanks.

  16. Neato. I didnt really think of seeing what the rates actually turned out to be even with the penalty calculated. Can some ingenious techie create a web page where you enter rates, terms and penalties and find the effective yield? or draw the curve for you? I know a spreadsheet on this would be pretty easy.

    I am sure the banks would close this loophole if enough of us drive our buses through it……. :-)

  17. @Cameron – Here’s what I did… The rate is 3.04% compounded daily. I did assume each month is 30 days, which gives 2 years as 720 days as opposed to 365*2 = 730.

    For 2 years, every one dollar will turn out to be

    (1+0.0304/360)^720 = $1.0618

    However, with 60 days penalty you’ll actually get $1.0565.

    Annualizing this = 1.0565^(360/720)-1 = 2.83%.

    Let me know if I missed something.

  18. saywhat? says:

    Seems strange that you’d be offering ways to game the system for a financial company that taxpayers are supporting?!

  19. saywhat? I’m sure Ally makes money on all those CDs, so we’re actually supporting a financial company that taxpayers (we, again) are supporting.

  20. This makes even more sense now that Alliant has dropped their CD rates. I’m slowly laddering into these about 10% each month.

  21. Curious………

    Anybody care to give feedback (logical or emotional) as to how they prefer accrued interest be paid?

    I started one and chose monthly deposits back into my regular Ally account. My personal reason was that there’s just a value (imho) to seeing that money accrue every month. Is it foolish?? Not enough to worry about??

    Things that make you go hmmmmmmmmmmmm….. ;)

  22. Red – I did the same thing, for the same reason. I like to see the monthly deposit. From the purely financial point of view it would be better to leave the interest in the CD because it compounds at the higher rate (CD rate vs. Ally savings acct rate). But at these low interest rates the difference is not enough to worry about.

  23. Thanks Warren. ;)

    Anybody else notice the rates dropped for 3 straight days in a row??

    3.09%
    3.04%
    2.99%

    Wonder what it’ll be tomorrow?? LOL

  24. Don’t blame me! :)

    Remember, Ally Bank has a 10-day Best Rate Guarantee. Make sure they stick to it!

  25. Tomsirois says:

    Do you know if Ally Bank will allow “partial” withdrawals? Some banks assess a penalty based on the amount you withdraw, rather than on the full balance. This could help eliminate the need to open several small certificates.

  26. @Tomsirois – Unfortunately, there are no partial withdrawals allowed.

  27. Excellent idea! I’ve just opened up my CDs with Ally.

  28. In Canada, the 5yr GIC rate (same as CD) is 3.6%. However, if you redeem prior to maturity at any time, the rate drops to 1.5%.

  29. Great idea thanks for the info. I noticed ally also has an 11 month No Penalty CD with an APY of 1.40. This seems like a pretty good deal…any thoughts?

    I don’t yet have any accounts with ally, but I’m planning on opening some. How easy is it to manage multiple cds? Do you need a checking or savings account with ally to open the cds? Anyone with experience please let me know.

  30. Thad,

    I’ve actually put together a web tool that calculates the rate with the penalty. It even draws a graph, showing the penalty APY against the standard one, which looks just like the one in this article. Click the link in my name to give it a try.

    I think this could be a handy tool for considering rates against the potential for rising inflation in the near-term.

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