Risk / pitfalls of CD at smaller banks

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
bobbybob
Posts: 2
Joined: Mon Oct 12, 2020 7:43 pm

Risk / pitfalls of CD at smaller banks

Post by bobbybob »

Hi all,

I see that INSBANK has a 1% 12 months CD here: https://online.insbank.com/certificate-of-deposit/ That looks quite attractive given the current rates.

I have never opened a CD at a small institution. INSBANK is a tiny online bank but is FDIC insured, at least according to their website. Are there any risk of headaches with smaller banks? Like having money stuck for a while and having to mail a bunch forms or spend hours on the phone to get it sorted out? Any experience with them. Would you buy this CD?

Thanks
anonsdca
Posts: 407
Joined: Mon Jun 01, 2015 11:47 pm

Re: Risk / pitfalls of CD at smaller banks

Post by anonsdca »

bobbybob wrote: Mon Oct 12, 2020 7:52 pm Hi all,

I see that INSBANK has a 1% 12 months CD here: https://online.insbank.com/certificate-of-deposit/ That looks quite attractive given the current rates.

I have never opened a CD at a small institution. INSBANK is a tiny online bank but is FDIC insured, at least according to their website. Are there any risk of headaches with smaller banks? Like having money stuck for a while and having to mail a bunch forms or spend hours on the phone to get it sorted out? Any experience with them. Would you buy this CD?

Thanks
I have not applied here. Sometimes DepositAccounts.com has reviews on these smaller banks. I dont see any for this one tho.
000
Posts: 3205
Joined: Thu Jul 23, 2020 12:04 am

Re: Risk / pitfalls of CD at smaller banks

Post by 000 »

Yes, bank selection matters because FDIC does not cover everything, like theft of assets or identity breach.

That said, you will have to determine for yourself if this bank is more secure than others.
MikeG62
Posts: 3228
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: Risk / pitfalls of CD at smaller banks

Post by MikeG62 »

bobbybob wrote: Mon Oct 12, 2020 7:52 pm Hi all,

I see that INSBANK has a 1% 12 months CD here: https://online.insbank.com/certificate-of-deposit/ That looks quite attractive given the current rates.

I have never opened a CD at a small institution. INSBANK is a tiny online bank but is FDIC insured, at least according to their website. Are there any risk of headaches with smaller banks? Like having money stuck for a while and having to mail a bunch forms or spend hours on the phone to get it sorted out? Any experience with them. Would you buy this CD?

Thanks
Yes it can be more painful dealing with smaller banks - and this one is tiny. Could be a pain to get funds out once the CD matures. No mention of EWP on their website. No mention on their website of FDIC insurance - or if it's there its not prominently displayed. FDIC does list a bank with the same name as being part of the FDIC. Probably is them, but check to be sure.

Personally, I'd pass. I think you can find 1.0%+/- on a 12-month CD at larger banks or CU's.

FWIW, I have CD's at three different banks and three different credit unions. All are large and well known, except one of the banks (small local bank with just a few branches). Experience with that bank was different than dealing with the other five. YMMV.
Last edited by MikeG62 on Wed Oct 14, 2020 6:48 am, edited 1 time in total.
Real Knowledge Comes Only From Experience
User avatar
dratkinson
Posts: 5077
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Risk / pitfalls of CD at smaller banks

Post by dratkinson »

Had similar problem a few years back with maturing CDs, and decided to change direction. (My B&M financial home is a smaller CU with non-competive rates.)


Based on my newly-discovered risk tolerance---could no longer stand taking too little risk---and tax brackets, I rolled my mature CDs into municipal bond funds.

With...
--1yr of living expenses in low-interest insured bank accounts earning ~2%/yr tax-free (search forum for "ABP by CC technique"),
--and >1yr of living expenses in long-term national and single-state muni funds earning a higher after-tax return,
--I now have fat emergency funds, so can withstand more risk.

So, I no longer chase bank/CC teaser rates or account opening bonuses. Just much simpler to rebalance into munis instead of CDs.

Yes, capital gain/loss is an issue when selling. But bond fund prices fluctuate only 5-15%, so CGs are a small issue. And I have the option to...
--Sell only long-term shares to minimize LTCG.
--Sell only short-term shares to maximize STCL.
--Overfill bonds to ~120% (=1/(1-.15)) of anticipated need to reduce the worry about a market fluctuation meaning I don't have enough for a planned purchase.

Yes, risk and reward are related---can't have one without the other. I did tax-loss harvest munis in 2018, but this was an academic exercise---the opportunity presented itself---not a necessity.

I'm much happier with munis than chasing CD rates, or feeling like I'm leaving money on the table with my CU. And my financial life is simpler---no need to go in to open new CD, no early withdrawal penalty.


But! before going a more risky route, you'll need to do some reading, study, and understand your true risk tolerance. (Took me 5yrs to get there.)



Welcome.


Edit. Second thoughts.
Last edited by dratkinson on Tue Oct 13, 2020 5:04 pm, edited 1 time in total.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.
kaneohe
Posts: 6733
Joined: Mon Sep 22, 2008 12:38 pm

Re: Risk / pitfalls of CD at smaller banks

Post by kaneohe »

bobbybob wrote: Mon Oct 12, 2020 7:52 pm ...............................

I have never opened a CD at a small institution. INSBANK is a tiny online bank but is FDIC insured, at least according to their website. ................................
Thanks
might be better to check FDIC website https://www.fdic.gov/resources/deposit-insurance/
Scooter57
Posts: 1536
Joined: Thu Jan 24, 2013 9:20 am

Re: Risk / pitfalls of CD at smaller banks

Post by Scooter57 »

You can find that rate at better online Credit Unions and some banks.

Visit https://deposit accounts.com and follow their blog. A link on their top menu will show you dozens of top rates available in your region. They show you data on the assets and stability of all the institutions they cover. Dealing with local brick and mortar banks, which are small in my region, has been much more annoying than using A-rated online banks and CUs I've found on that website.

I would not invest in one that doesn't have reviews. There is an active review community at that site and I have found their reviews can be trusted.
Topic Author
bobbybob
Posts: 2
Joined: Mon Oct 12, 2020 7:43 pm

Re: Risk / pitfalls of CD at smaller banks

Post by bobbybob »

Okay. So the consensus is: Don't go blindly for the first bank with a high rate but consider reviews and consumer ratings. I did find INSBANK through https://www.depositaccounts.com/cd/ For my area, it is one of the better offers. However, it has no reviews, so I will pass.

ConsumerCredit Union does have a 1.1% 20 month jumbo CD. But I guess I will settle for 0.65% at Ally/Marcus for simplicity. I already hold a bunch of munis (split 50/50 between VCADX and VMLUX), so I am reluctant to put more eggs into the muni basket.
ivgrivchuck
Posts: 270
Joined: Sun Sep 27, 2020 6:20 pm

Re: Risk / pitfalls of CD at smaller banks

Post by ivgrivchuck »

For small balances, I-bonds might be a reasonable option.
44% VTI | 36% VXUS | 10% I-bonds | 10% EE-bonds
Doctor Rhythm
Posts: 469
Joined: Mon Jan 22, 2018 3:55 am

Re: Risk / pitfalls of CD at smaller banks

Post by Doctor Rhythm »

Contrarian viewpoint here - I’m fairly comfortable going with a bank that I haven’t heard of as long as I know they’re legit/FDIC insured. Part of the calculus is how much additional absolute return as I getting. For a $10,000 12-month CD with a 0.3% difference in APY, the extra $30 is probably not worth whatever small added risk there might be. A bigger deposit and bigger yield difference might swing me.

FWIW, I’ve never had a problem with a CD at an online bank, but just finished a 4 phone calls + 30’ in branch tragicomedy, trying to close a CD account with that big national bank with a stage coach logo.
Post Reply