By Chelsea BeckWhy Do Longer CDs Have Lower Rates?
Quick Answer
While long-term CDs have historically carried higher interest rates than their short-term counterparts, this trend has recently reversed due to expectations of falling interest rates.
Historically, long-term certificates of deposit (CDs) have offered higher interest rates than their short-term counterparts. And this makes sense: Banks typically reward customers for keeping their money with them for longer periods of time.
But recently, due to expectations of falling interest rates, this trend has flipped. As of May 2025, six-month CDs offer an average rate of 2.40%, while four-year CDs offer 1.82%, according to Curinos data.
If you're looking to open a CD in today's rate environment, it's important to understand how this trend can impact your earnings. Here's what you need to know about current CD rates and how to choose the best CD for your financial goals.
Why Do Long-Term CDs Have Lower Rates Now?
Long-term CDs are currently offering lower rates because the Fed's recent cycle of rate hikes has ended, and many economists believe cuts are on the horizon.
CD rates generally follow the Federal Reserve's federal funds rate. When the fed rate rises, so do the rates on short-term CDs. On the other hand, long-term CD rates are based more on expectations: Their rates tend to rise or fall depending on where interest rates are expected to be in the future.
If banks think rates will be lower in the coming years, they have less incentive to offer high rates on long-term CDs. For example, they don't want to lock themselves into paying 5% for five years if they believe they'll only need to offer 3% or less in three years. Instead, many banks are offering higher rates on short-term CDs, while keeping long-term rates lower in anticipation of future interest rate delinces.
Short-Term CDs vs. Long-Term CDs
| Feature | Short-Term CDs | Long-Term CDs |
|---|---|---|
| Length | 3 months to a year | 3+ years |
| Interest rate | Currently higher | Currently lower |
| Access to funds | Sooner, since they'll mature in a year or less | Later, since long-term CDs last three years or longer |
| Flexibility | Greater, as you can move your money into other types of accounts more quickly if you choose | Less, as you'll need to stay invested in your CD for at least three years or face an early withdrawal fee |
Opening a short-term CD may be a smart move if any of the following apply to you:
- You want a higher yield now. Because short-term CDs are currently offering higher rates, you can earn more by locking your money up for a few months rather than several years.
- You want the flexibility to reinvest soon. Short-term CDs mature quickly, allowing you to reevaluate your options sooner. If interest rates rise, you can pursue more lucrative opportunities.
- You anticipate needing an early withdrawal. Withdrawing your money before the CD matures can result in an early withdrawal penalty. If you think you'll need access to funds within several months to a year, a short-term CD could be the way to go.
While short-term CDs may seem more attractive at the moment, there are still solid reasons to consider a long-term CD. You might opt for a long-term CD under the following circumstances:
- You want to lock in a rate before cuts. Additional rate cuts could be on the horizon, and if you find a rate you're happy with, you can lock it in for several years with a long-term CD.
- You want stable, predictable income. Long-term CDs offer consistent returns over time, making them ideal for those seeking predictable earnings.
- You want to set it and forget it. Long-term CDs are a great choice for those who prefer a hands-off approach to investing. Once you open the account, you can put it out of sight, out of mind until maturity.
Learn more: Short-Term vs. Long-Term CDs: Which Is Best for You?
How to Choose the Best CD Account
Whether you're in the market for a short-term or long-term CD, following these tips can help you get the best possible rate:
- Shop beyond big banks. Nontraditional financial institutions such as online banks compete with big banks by offering higher yields and better terms in many cases. Shopping around with different types of financial institutions can help you find the best returns.
- Compare offers. Don't jump at the first offer that comes your way. Rates, minimum deposit requirements and early withdrawal penalties can vary widely. Compare multiple CDs to see who's offering the best deal.
- Consider promotional or "special" CDs. Be on the lookout for hidden gems. Banks sometimes offer promotional or special CDs with higher-than-average rates for specific terms.
- Review your timeline. Choose a CD that aligns with your financial goals and liquidity needs. While locking your money away for too long can be risky if you think you'll need an early withdrawal, it can be a good option for those with more flexible timelines.
The Bottom Line
Short-term CDs are currently offering higher rates than long-term CDs, a break from the norm. While unusual, this trend can actually work in your favor if you want a quicker payoff. By keeping your timing and financial goals in mind, you can choose a CD strategy that makes the most sense for your money today.
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About the author
Chelsea Beck
Chelsea Beck is an SEO content specialist at Experian. She researches topics that help consumers with their credit and finances. She holds a bachelor's degree in English from Utah State University.
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