ELoan CD Early Withdrawal Penalties are Too Onerous, Not Market

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As interest rates (and the stock market) appear to be headed down over the last few weeks, there has been renewed interest in longer term CDs as a place to hide out, preserve cash, gain yield. ELoan's rates are among the highest on BestCashCow.com's CD tables, but the onerous early withdrawal penalties mean they might not be the best place to put your money.

ELoan, which is now owned by Banco Popular, currently has some of the best online CD rates just about all maturities on the BestCashCow.com CD tables.  While the recent rise in ELoan's rates might be somewhat driven by Puerto Rico's credit problems, the CDs are issued by Banco Popular's NY branch and are fully FDIC insured (as long as you stay within FDIC limits).  However, if you look at the terms on ELoan’s website, you’ll see that the penalties for early termination are extraordinarily onerous.  ELoan charges 2 years of interest as a penalty for early termination of a 5 year CD, 1 year on the 3 and 4 year CDs, and 9 months on the 1 year CD.   If you were to put $200,000 in a 5 year CD with ELoan and then either need the money or see much higher rates, you would be paying almost $5,000 in penalties to become liquid.  Given the likelihood of dramatically higher interest rates, it would be foolhardy to tie your money up in a CD with such dramatic early termination penalties.

ELoan’s penalties are completely out of line with those of ELoan’s competitors.  Albeit with slightly lower rates, Sallie Mae’s 1 year CD has a 3 month early termination penalty.  Barclays Bank and Synchrony Bank offer online 5 year CDs carrying only a 6 month penalty (learn more about strategies involving these rates here).    CIT Bank offers a 5 year CD with a 1 year early termination fee, and has very 1, 2, 3 and 4 year Ramp Up CDs that allow you to get a higher rate if interest rates rise (CIT’s Ramp Up CDs were named a BestCashCow.com Best Bet for 2015).  

Given the likelihood of dramatically higher interest rates in the intermediate term - if not the near term -  we feel that depositors would be much better served to look at these products and to avoid ELoan onerous early termination fees.

See and compare all of the best CD rates, online and available locally, here.

See all of the best CD rates here.  


Banco do Brasil Americas Rolls Out Great Rates on Money Market Account and CDs

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No, it's not Carnival, but Banco do Brasil Americas has broken out savings and CD rates that are amongst the best in the country for balances of $100,000 or over. If you don't want to deposit that much in the bank, their rates for balances between $10,000 and $99,999 aren't bad either. The chart below shows their rate offerings:

No, it's not Carnival, but Banco do Brasil Americas has broken out savings and CD rates that are amongst the best in the country for balances of $100,000 or over. If you don't want to deposit that much in the bank, their rates for balances between $10,000 and $99,999 aren't bad either. The chart below shows their rate offerings:

Product

APY $10,000 - 99,999

APY $100,000

Money Market Account

1.00%

1.20%

1 Year CD

1.25%

1.35%

2 Year CD

1.40%

1.60%

3 Year CD

1.50%

1.70%

4 Year CD

1.60%

1.80%

5 Year CD

2.25%

2.50%

 

Banco do Brasil has six locations in southeastern Florida.

The bank is financially sound with a Texas ratio well below the national average (a low Texas ratio is good).

For those that live in southeastern Florida, these rates are worth checking out.

If you don't live in this bank's deposit area, find the top rates in your location


Amex Offering A 5-Year CD Through TD Ameritrade at 2.40%

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This issue's yield looks attractive, but it should be avoided.

TD Ameritrade is contacting all of their clients today to try and syndicate a 5 year CD paying 2.40%.   This CD is covered under FDIC insurance rules to the $250,000 limit and because it is issued by Amex Centurion Bank, it is covered under a different FDIC certificate than savings accounts you may have at American Express Bank FSB.  It also may offer a yield slightly higher than the best 5-year rates otherwise available.  Nevertheless, these types of brokered issues should be avoided.

Longer-term CDs, such as a 5-year CD, can be attractive, even in a low rate environment, but only when they offer a reasonable termination clause.  As this article explains, a 5-year CD with a 6 month early termination fee can effectively represent a way to get a decent one-year yield with an option to continue to hold the CD if interest rates do not rise in the outer years.

Brokered CDs, like this Amex issue through TD Ameritrade, do not offer this option.  If interest rates rise, you are either stuck earning a below market interest rate or forced to sell the CD at a loss through TD Ameritrade. 

Longer-term interest rates may rise dramatically at some point over the next 5 years.  In fact, a dramatic spike may occur in the next year when the Federal Reserve begins to raise interest rates later this year.   Even if you commit to trying to get out of this issue at the earliest signs of a interest rate move, you are going to take a huge loss selling through TD Ameritrade into an illiquid market (in fact, you would take a huge loss were you to try to sell this issue the day after purchasing it since the market is entirely illiquid).   In an online 5-year CD with a 6 month early termination penalty - such as those offered by Synchrony Bank and Barclays Bank - you always have the option of holding the CD for 6 months and using the six months' interest to cover the penalty.   

It should also be noted that most online brokers waive the early termination penalty upon the death of the holder, allowing the heirs / beneficiaries or executor to redeem the CD at par value.  TD Ameritrade usually also forces brokered CDs to be sold into the market at a loss upon death, although with this offering they claim to offer a survivor’s option (when I called TD Ameritrade about this issue, their fixed income department was unable to fully explain or document the details of this option).

Compare the best 5 year CD rates.


Home Savings in Northeast Ohio Offering Special 12-Month CD at 3.00% APY

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Lucky savers in Ohio will be able to open a 12-month CD from Home Savings that pays 3.00% APY. This is easily the best 12-month CD rate available in the country.

In the comments section for Home Savings (the official name of the bank is The Home Savings and Loan Association of Youngstown, Ohio), some visitors questioned whether the 3.00% APY 12-month CD listed on BestCashCow was valid. It seems almost too good to be true. We checked it out and the rate is valid. This is easily the best 12-month CD rate available in the country. For comparison, the best 1 year online CD rate is 1.23% APY and the average rate for this term is 0.35% APY.  

The CD can only be opened at select branches including Chardon, Aurora, Salem, and Streetsboro. The rate is only good with new money deposited into the bank.

Home Savings branches are located in Northeast Ohio. The bank was established in 1889 and has assets of $1.8 billion. Home Savings is an FDIC insured institution.

If you live anywhere near a Home Savings branch then it makes sense to give them a call or pay them a visit and see if they offer the special rate.

Don't live near a Home Savings bank? BestCashCow lists plenty of above-average online and local rates you are eligible to open.


Barclays and Synchrony 5 Year CDs Offer Attractive Early Termination Terms

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Early termination fees of only 6 months simple interest on the 5 year CDs offered by Barclays and Synchrony make these products more attractive than short term CDs and allow you to approach them as having the option to continue to earn 2.25% APY for as long as US interest rates rates remain low.

Author's Note: In late 2017, Synchrony changed the earlier termination fee on its newly issued and renewed 5-year CDs to 1 year simple interest from 6 months.

It is beginning to look like interest rates in the US may never rise.  Yield markets are no longer pricing in a move by the Federal Reserve in the summer of 2015, and most believe that any move to raise interest rates is going to be very slow and deliberate and will not bring interest rates near historical norms for the foreseeable future.  Low energy prices and global easing have removed any inflationary pressure.  Yellen is very dovish.

Against this backdrop, depositors need to look for ways to earn more than the rates that online banks are currently paying (see the best rates here).  Barclays Bank and Synchrony Bank both offer 2.25% APY online certificate of deposit (CD) products.  As both CD products offer early termination fees of only 6 months simple interest, they essentially give a depositor the option to terminate the CD with very acceptable consequences when and if rates begin to rise.

Let's illustrate this with some numbers.  Assume you put $100,000 into one of these 5 year CDs.  Suppose that in one year's time rates have risen to a point where you are able to get a higher interest rate on a savings account or a short term CD than 2.25%.  You would have earned $2,250 in interest on your CD, but in order to release yourself from the obligation to hold the CD for four more years until maturity, you would be responsible for paying $1,125, half of your interest, as an early termination penalty.  The 1.125% that you will have effectively earned over the one year that you held the CD will outperform current online savings rates, and is just slightly less than the best one year CD rates (see these rates here).

And, if rates still haven't risen in one year, you continue to hold the CD until they do rise.  And, if the US is the new Japan and rates never rise, you will earn more than twice as much interest on your cash over than next five years than you would earn by staying put in even the highest yielding online savings accounts.

Note: You may be able to earn a higher rate on a 5 year CD than those rates mentioned.  Compare all five year CD rates here.  Also, you may wish to check with other banks as some banks may offer still less onerous early termination fees.

Editor's Note: As of the middle of 2016, both Barclays and Synchrony were offering 5-year CD rates below those mentioned in this article.  Additionally, Synchrony has now changed their teams and conditions so that 5-year CDs now have a 1-year early termination fee.


Solar Bonds Pay Up to 5.75%. What's the Risk?

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On Facebook I saw an ad promoting a Solar Bond that paid up to 5.75%. Intrigued, I clicked over to learn the details. The good news is that the bonds are offered by Solar City, a legitimate, publicly traded company that is a leader in installing solar panels on houses and businesses. The company chairman is publicly traded on the Nasdaq at SCTY. Its chairman is Elon Musk of Tesla and SpaceX fame.

On Facebook I saw an ad promoting a Solar Bond that paid up to 5.75%. Intrigued, I clicked over to learn the details.

The good news is that the bonds are offered by Solar City, a legitimate, publicly traded company that is a leader in installing solar panels on houses and businesses. The company is publicly traded on the Nasdaq at SCTY. Its chairman is Elon Musk of Tesla and SpaceX fame. Mr. Musk is a bold visionary who exceeds at extracting an enormous amount of capital from investors with Herculean bets on the future. His track record at generating profits at the companies he is associated with is less impressive as neither Tesla or SpaceX are profitable at their core businesses - yet.

Their general model is for the company to pay for the cost of the installation and then lease the equipment back to the homeowner over a twenty-thirty year period. The savings that the homeowner generates on their electricity bill pays for the lease and often leaves some left over, providing an electricity credit to the homeowner. Government subsidies of up to 30% of the installation cost also help to make the installation more affordable for Solar City and the homeowner.

The company is offering several different bond terms. The current terms and their rates are listed below:

1 Year:   2.00%

3 Year:   3.00%

5 Year:   4.00%

10 Year: 5.00%

15 Year: 5.75%

These rates are for bonds purchased directly from the company via an online ordering system. I haven't tried the system so can't vouch for how hard or easy it might be to register and order. Investors can also purchase them through a broker but the rates are slightly lower.

These bonds are not FDIC insured and if the company goes bankrupt, bondholders could lose interest or even principal. Interest is typically paid semi-annually (twice per year) although it may vary according to bond type.

Should You Invest in Solar Bonds?

As of April 15, 2015, the best risk-free rate on an FDIC insured CD according to BestCashCow is close to 2.30% APY.  The rate on a five year Treasury Security is 1.31%. The five year muni bond average is a bit worse according to Bloomberg at 1.26%. The ten year yields show a similar spread. Solar City's offering is akin to a high yield bond, otherwise known as a junk bond. Now, the name doesn't mean the bond is junk, but it is risky. An examination of the company's income statement and balance sheet will illustrate the risk.

Solar City's 2014 annual report shows that the company had a net loss of $375 million versus a net loss of $96 million in 2013. Why the loss? The company had an operating profit of $79 million with a 30% operating margin. It's not a great margin but at least  they generated an operating profit. Their operating expenses, especially Sales and Marketing were responsible for the widening loss.  One way to look at this is that Solar City is in expansion mode and is paying heavily now to get as many panels on customer homes as it can. Once it does this, it will have a recurring revenue stream for the next 30 years, as consumers are not going to rip up the panels.  Sounds good. The only problem is that 30 years is a long time. New technology may arrive and make these panels obsolete. Or the utilities may change the way they buy back excess electricity from the homeowner. As a bondholder, you will have to be confident that no matter what the changes, the company will have enough cash over the time period of the bond to pay you interest and also principal.

The balance sheet shows the company has about $700 billion available in cash or cash equivalents to pay the bills. Looking at cash flow, the company used up $1.3 billion in cash last year, the biggest amount being used for payments for solar energy systems that will be leased.

You can see the entire SEC filing here:

http://investors.solarcity.com/secfiling.cfm?filingID=1564590-15-897&CIK=1408356

The company is a bet on whether it can successfully deploy and lease these solar energy systems in a way that generates enough positive cash flowing going forward.

Conclusion

Solar City is a promising company, but it is also a risky one with no history of profits. It could succeed spectacularly or it could also just as spectacularly crash and burn. Whether you invest and how much you invest depends on your risk tolerance.

If you are willing to stomach the potential of losing your investment and want the higher yield, then this might be an investment for you. The shorter term bonds obviously offer less risk.

If you want to be as assured as possible (is there really ever any assurance in life?) that you will receive your interest payments and principal back then this is probably not an investment for you.