12- vs. 24-Month CD: What's Best for You?

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There's a reason every other person you know has been talking about opening a CD lately. CD rates are sitting at some of their highest levels in years. But those rates may not last much longer.

The reason CDs are paying so generously at present is because the Federal Reserve spent much of 2022 and 2023 raising interest rates to help slow the pace of inflation. Now that inflation has cooled nicely, the Fed has signaled that it should be ready to start cutting interest rates at some point this year.

There's a fair amount of pressure to cut rates because the central bank's hikes have made borrowing more expensive for consumers. Once rate cuts arrive, products like personal loans and mortgages may become a bit less expensive to sign.

If you're eager to open a CD before rates start to fall, you may be torn between a 12-month CD and a 24-month CD. Ask yourself these questions to figure out which is the better choice.

1. Which term offers the better rate?

These days, you'll find that many banks are offering a higher interest rate on a 12-month CD than a 24-month CD. But that may not be a given.

Before you make your decision, spend a good amount of time looking around. You may find that the APY on a 12-month CD is highest across the board, but since it's your money at stake, it pays to do your research.

2. Which term will give me the highest total payday?

You might snag a higher APY on a 12-month CD than a 24-month CD right now. But that doesn't automatically make a 12-month CD your most lucrative bet.

We just discussed the fact that the Fed plans to start cutting interest rates soon. If you lock in a 12-month CD today, you might earn more over the next year than with a 24-month CD. But then, you're taking the risk of rates plummeting substantially over the next 12 months.

To put it another way, say you're looking at a 5.00% APY on a 12-month CD and a 4.00% APY on a 24-month CD. If you open a 24-month CD with $10,000, you'll earn $816 in interest. With a 12-month CD, you'll earn $500 in interest your first year.

But what if in a year from now, the best 12-month CD rate you can get is 2.50%? That'll put another $262.50 in your pocket. But when you add that to $500, it's $762.50, which is less than the $816 you would've gotten with the 24-month CD. So while you might think a 12-month CD is the more lucrative bet, in this example, you'll come out $53.50 richer with the 24-month CD.

3. Which term better aligns with my financial needs?

Maybe you're hoping to buy a home in 2026. Or maybe you're looking to start graduate school that year and will need access to all the money you can get your hands on. In either case, a 24-month CD may be a riskier bet than a 12-month CD.

What if you're accepted to an academic program for January 2026, but your 24-month CD won't mature for another six months at that point? You may be forced to borrow money to pay your tuition instead of accessing the cash that's already yours in the bank. Or, instead of borrowing, you might withdraw your CD early and face a penalty. Neither is ideal, so think about your personal financial plans before committing to one CD term versus the other.

A lot of people are drawn to 12-month CDs right now because they're generally the product with the highest rate. But before you make your choice, look at the big picture and crunch all of the numbers to come to a wise decision.

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