Auto-renew cds–what are auto renew cds anyway?
Investors who open CD accounts agree to certain terms, rates, and conditions. Once the investments reach the maturity dates, investors must decide whether to re-invest in the same CDs, pull out the money, or invest in other CDs. Many investors may not know that some certificate of deposits come with an auto-renew feature that reinvests the money in the same type of CD, usually for the same terms. Auto-renew options give financial institutions a great deal of freedom with investors’ money. This option may or may not be a good option for investors.
How do Auto-Renew Certificate of Deposit CDs Work?
Auto-renew CDs work similar to traditional CDs. Investors make an agreement with CD issuers to open CD accounts for agreed terms and rates. Once the account opens, the investor agrees to keep the money in the account until the maturity date. The difference in auto-renew accounts occurs as the CDs approach the maturity dates. Auto-renew CDs allow the issuer to reinvest the money.
Issuers are supposed to contact investors 30 days before the maturity date reaches, or 20 days before the end of the grace period. If investors do not express their wishes to withdraw the money or reinvest in other CD options, issuers automatically renew the CDs as they wish. The renewal process can be an advantage or disadvantage to investors.
Advantages of Auto-Renew Certificate of Deposit CDs
- Investors benefit if the market rates increase. If the market rates increase, issuers may increase the new CDs to the higher market rate. Issuers have the right to decide on the rate of the new CDs with new terms. Issuers at financial institutions usually keep the rates at the current market rate value.
- Investors do not have to worry about shopping around for new rates and terms. Shopping around for new rates can be very time consuming to investors. If rates increase, issuers generally keep the rates the same as the market rates. Issuers save investors time that they can use to research other investment ventures.
- Investors have a grace period before the auto-renewal. The grace period is usually 7 to 10 days after the maturity date. Investors have a window of time to decide if they are still interested in renewing the CDs, or if they want to try other investment options. Issuers are supposed to notify investors prior to the maturity date so that investors can be aware of the upcoming dates. This window of time gives the investor options to decide what to do with their money.
Disadvantages of Auto-Renew Certificate of Deposit CD
- Issuers may invest the money in lower interest CDs. Issuers at financial institutions do not always make the choice to reinvest investors’ money in the same CDs at the same rates for the same terms. Unfortunately, issuers have control over the decision if investors do not respond to contacts before or during the grace period. If the market rates decrease to half the old rates, investors may lose future interest. For example, if investors currently have a 5% interest rate on their CDs and the market rate decreases to 2.5% interest, issuers have the option to renew the CDs at the lower interest rate. Once the rate is locked, investors are stuck with the terms until the next maturity date.
- Auto-renewal does not give investors options. Auto renewal does not offer options to investors. Issuers have total control over investors’ investments. The portfolio of investors should reflect their personal investment interests, not that of the issuers.
- Issuers do not always notify investors. Issuers are supposed to notify investors before the maturity date and the grace period. If investors are not notified, their investments are in the hands of the financial institutions. In certain cases, issuers notify investors by mail or telephone. If investors forget to open their mail or call back their missed calls, they may unintentionally avoid contacts from CD issuers.
- The investment may not reflect future financial needs. The needs of investors change. Investing money into 3 or 5 year CDs may no longer be the current financial needs of investors. Investors may want to invest more money in higher interest CDs or they may want to close the accounts and try other investment ventures.
Auto- renew CDs may limit the options for serious investors. On the other hand, auto-renew CDs may increase the profit of an already impressive financial portfolio. Investors must carefully evaluate their financial needs to decide if auto-renew CDs are beneficial investment options.