CD Right to Delay Terms: What are right to delay terms? Introduction:
CDs are great investments for present and future needs. Investors who invest in CDs do so because they are relatively safe and reliable ways to make money. Even though CDs are great, safe investments, financial institutions have the right to withhold funds for a specific period of time. This amount of time varies by financial institution. The “right to delay terms” is a banking term that basically means that financial institutions have the right to delay withdrawal for a certain amount of time to prevent bank runs.
Bank runs occur when a substantial number of bank customers withdraw their funds because they are afraid that the financial institution will not be able to pay customers their money. Bank runs can lead to bankruptcy and economic depression. The “right to delay terms” feature helps banks remain stable. Investors are not allowed to withdraw any money from their CDs during this time.
Advantages of Using a Certificate of Deposit CD with Right to Delay Terms
- It protects banks from failing. The bank failures of 2008 are proof that the economy depends on financial institutions to stabilize the economy. They depend of the deposits of investors to pay their bills, make investments, and pay customers. CD accounts cannot offer competitive rates and terms without CD deposits. The right to delay terms feature makes sure that investors continue to make money and that their money is available when the right to delay is lifted.
- It prevents recessions. The Great Depression is proof that a recession can lead to economic depression. It is extremely hard for the economy to recover from recessions. It doesn’t hurt to leave CDs in the bank for a little longer to prevent a recession. Once the right to delay period is over, investors can access the money in their CDs as they wish.
- It allows more time for investors’ money to grow. As long as money sits in the bank, investors are making money. The right to delay is a method of protecting the assets of investors. Investors can be happy that their money has grown more interest during the period that issuers exercise their right to delay withdrawals.
- It strengthens banking system. The longer investors leave their CDs in banks and credit unions, the stronger these financial institutions become. Financial institutions depend of investors’ money to pay interest and dividends to investors. When the banking system is strong, investors benefit from various incentives and options that the financial institutions offer their customers.
- It protects investors’ assets. The right to delay withdrawals helps protect investors’ money. If everyone who owned CDs decided to withdraw them at the same time, financial institutions would not be able to pay all of their customers. Investors should see this feature as a protection method.
Disadvantages of Using a Certificate of Deposit CD with Right to Delay Terms
- It takes control away from the investors. Investors lose control of their money. Investors may want to withdraw their CDs and deposit the money in CDs with higher interest rates, but they cannot do so during the period of the right to delay withdrawals.
- Investors may not be able to get their money when they need it. Investors may have a real emergency that requires them to withdraw money from CDs or close the accounts. There is no way to withdraw the money from their CDs during these times.
- Investors can lose money if the banks are not FDIC insured. The right to delay may hurt investors who invest their money in banks that are not FDIC insured. Many investors choose these banks because they offer higher interest rates, but they may be very disappointed when their amount of money decreases, if there is any left in the event banks fail.
- It can lead to economic depression. The economy is currently in recession. An economic depression can create a repeat of the Great Depression.
- It may spark withdrawals that can lead banks to fail. When customers withdraw their money, it can have a domino effect on banks. Investors may wait in line to withdraw their money once the right to delay withdrawal is lifted. Even if the economy or the banks are not in the midst of financial ruins, the fact that any bank or credit union uses their right to delay may cause many bank customers to withdraw their money.
Investors should make sure that they have emergency funds set up for events that arise. Financial institutions have a right to prevent investors from withdrawing their CDs for a specified amount of time. Read the fine print carefully when opening CD accounts.
Keep reading to learn about other CD Terms.