Certificates of deposit (CDs) are fixed-term savings products that typically offer higher interest rates than standard savings accounts. CDs come with both long-term and short-term options.
Let’s compare these two types of CDs and explore how they work. Learn how current market conditions impact CD rates, what penalties may apply for early withdrawals and how to align your choice with your financial goals and timeline.
What is a short-term CD?
A short-term CD is a savings option with a fixed interest rate and a maturity period that typically ranges from 3 to 12 months. It lets you earn a guaranteed return in a relatively short time, often at a higher rate than a standard savings account. This can make it a practical, low-risk way to grow your money.
The brief commitment period means you can access your funds sooner than you could with a long-term CD, which may be helpful if you have near-term goals or upcoming expenses.
Short-term CDs can provide a balance of security and flexibility, allowing you to take advantage of competitive interest rates while keeping your savings working for you. Just be sure to plan so you can avoid early withdrawal penalties and enjoy the full benefit of your investment.
What is a long-term CD?
A long-term CD is a type of savings account that locks in your money for a period usually ranging from 3 to 5 years or longer. By committing to keep your funds in the CD for a longer term, you typically earn a higher interest rate than you would with a short-term CD or a standard savings account. The interest rate remains fixed for the entire term.
The trade-off is that long-term CDs require a greater commitment of time. Withdrawing funds before maturity may result in higher early withdrawal penalties than short-term CDs, which can reduce or eliminate your earned interest. But if you do not need access to the funds in the short term a long-term CD may be a strong option.
Key differences between short-term and long-term CDs
Choosing between a short-term and a long-term CD comes down to how long you wish to commit your money, the interest rate you want to secure and how soon you might need access to your funds. Both options are safe, insured savings tools, but their features align with different financial goals.
The table below highlights the main differences to help you decide.
Feature |
Short-term CDs |
Long-term CDs |
Term length |
3 to 12 months |
3 to 5 years or more |
Interest rates |
Often lower than long-term CDs |
Typically higher, requiring longer commitments |
Liquidity and access |
Funds become available sooner, offering greater flexibility |
Funds are tied up longer, better for long-term goals |
Early withdrawal penalties |
Usually smaller, but can still reduce earnings |
Often larger, which can wipe out interest |
When a short-term CD may make sense
If you know you’ll need your funds in the near future — such as within the next several months — a short-term CD may be a good option. Because it matures in just 3 to 12 months, your funds stay safely parked but become available sooner, making it a smart choice for planned expenses or upcoming goals.
Short-term CDs may be especially appealing when federal interest rates are expected to rise. The shorter commitment lets you reinvest sooner at potentially higher rates, giving you both flexibility and the opportunity to keep your money working at its best.
