There’s a reason why CDs have been quite a popular savings option this year. For much of 2024, it was possible to capture a 5% CD. And while interest rates have fallen slightly over the past month due to the Federal Reserve’s September rate cut, many CDs are still paying near today to 5%. That makes them a good option, just like earlier this year.
But if you ask me, I don’t think many people will be lining up to open CDs in 2025. This is why.
1. CD rates will likely continue to decline
The Federal Reserve is not done cutting interest rates yet. The interest rate cut in mid-September will probably be the first of many.
But as the Fed continues to cut rates, CDs will start paying less. And there may come a time when savers say they are unwilling to commit to a CD if there is only minimal benefit.
Our picks for the best high-yield savings accounts of 2024
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American Express® High Yield Savings API 4.00%
Rate information Circle with the letter I in it. Annual return of 4.00% from November 1, 2024
Member FDIC.
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API 4.00%
Rate information Circle with the letter I in it. Annual return of 4.00% from November 1, 2024 |
Min. earn $0 |
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Capital One 360 Performance Savings API 4.00%
Rate information Circle with the letter I in it. See the Capital One website for the most current rates. Advertised Annual Yield (APY) is variable and accurate as of October 23, 2024. Rates are subject to change at any time before or after account opening.
Member FDIC.
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API 4.00%
Rate information Circle with the letter I in it. See the Capital One website for the most current rates. Advertised Annual Yield (APY) is variable and accurate as of October 23, 2024. Rates are subject to change at any time before or after account opening. |
Min. earn $0 |
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CIT Platinum Savings API 4.70% APY for balances of $5,000 or more
Rate information Circle with the letter I in it. 4.70% APY for balances of $5,000 or more; otherwise 0.25% APY Min. earn $100 to open an account, $5,000 for maximum APY
Member FDIC.
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API 4.70% APY for balances of $5,000 or more
Rate information Circle with the letter I in it. 4.70% APY for balances of $5,000 or more; otherwise 0.25% APY |
Min. earn $100 to open an account, $5,000 for maximum APY |
How low will CD rates be in 2025? That figure is difficult to determine and depends on how quickly the Fed tries to lower interest rates. And That will largely depend on how inflation develops. All in all, there are countless factors that play a role.
But it wouldn’t be surprising if CD rates fall to 2.5% to 3% by the end of 2025. Whether it’s worth buying a CD at that rate is up to you.
Remember, the average annual return of the S&P 500 over the past 50 years is 10%, which represents strong and weak years. Even though stock investments carry a lot more risk than CDs, if you have money you’re setting aside for a far-flung goal, it may pay to open a securities account and use it to invest in stocks instead of opening a CD in 2025.
2. Interest rates on loans are likely to fall
CD rates and borrowing rates tend to move in the same direction. At the moment both are gone. As the Fed continues to cut rates, both are likely to decline. But that could lead to a large number of consumers spending their money instead of saving in 2025.
For example, right now the rates for personal loans and car loans are quite high. But if those interest rates fall in 2025, more people may be inclined to borrow money to finance purchases like furniture, vacations, electronics and cars. And they may be willing to take money out of the bank to pay off those debts, or make down payments if applicable.
Of course, in 2025 you cannot arbitrarily borrow money just because the interest rate is lower. But if you’ve been saving for a specific major purchase, such as a new car to replace your current car that’s been giving you problems, you should know that you may be in a better position to continue with it in the new car . year. And in that case, it might make sense to use your money to meet a need (like replacing a car) instead of opening a CD.
Should you lock up a CD now?
All things considered, I expect that CDs will be less popular in 2025 than they are today. But what about today? Should you open a CD while rates are still close to 5%?
The answer depends on your situation. If you are saving for a short-term goal, I recommend doing so Shop around for the best CD rate and open a CD before prices fall further. But for a long-term goal, I recommend building a stock portfolio.
You also don’t want to tie up money in a CD that you might need for emergency fund purposes. So before considering a CD, make sure you have enough savings to cover at least three full months of essential bills.
Also remember that even if CDs become less popular in 2025, it doesn’t mean anything You shouldn’t buy one. Rather, it’s about being aware of the reasons why CDs may become less popular because they have the potential to impact your finances.