How CDs Work: Terms, APY, and What Happens at Maturity - 1st Source

Some money has a job.

It might be earmarked for a move this summer, a car down payment later this year, a wedding vendor schedule, or a planned home project. When that money sits in an everyday account, it’s easy for it to blur into “available cash,” even when it’s not supposed to be.

That’s where a certificate of deposit (CD) can fit. A CD is built for planned money: a set timeline, a stated yield, and a clear finish line.

The basic idea: a simple trade

A CD is a deposit account that comes with an agreement:

  • You put in a set amount of money.
  • You leave it there for a set period (the “term”).
  • You earn interest at the disclosed Annual Percentage Yield (APY).
  • When the term ends (the “maturity date”), you can take your money back—plus the interest you earned.

That’s it. No daily ups and downs like the market. No guessing what tomorrow brings. Just a predictable outcome tied to a calendar.

A few CD terms that matter

Once you know the vocabulary, CDs get much easier to compare.

Term
How long your money is committed to the CD, often measured in months or years.

APY
The number that helps you compare options. APY includes compounding, so it’s generally the most useful number to look at when you’re trying to compare one CD to another.

Principal
Your starting deposit.

Compounding
Interest earning interest. Depending on the CD, interest can be added to the balance during the term and then earn interest itself.

Maturity date
The date your CD term ends. This is when you get to make your next move.

Grace period
A short window after maturity when you can typically withdraw funds or change what happens next without an early withdrawal penalty. Details vary.

Auto-renewal / rollover
Some CDs renew automatically at maturity if you don’t provide instructions. It can be convenient—but you’ll want to know what the default is.

How CDs earn interest (without making it complicated)

When you open a CD, the bank discloses the APY and the term. Your balance earns interest based on those terms.

APY matters because it helps you compare options in a clean way. Two accounts can quote similar rates, but APY reflects the effect of compounding. If you’re comparing CDs, APY is usually the easiest apples-to-apples number to use.

Here’s a simple example with round numbers:

Say you deposit $2,000 into a 12-month CD at 4.00% APY.
Over the year, you’d earn about $80 in interest, ending around $2,080 at maturity. The exact amount can vary depending on how the CD compounds interest, but the overall concept stays the same: you can estimate the outcome up front.

Some CDs keep the interest in the CD until maturity. Others may offer interest payouts on a schedule. The important part is understanding whether the CD is meant to quietly grow until a future date, or whether you want interest paid out along the way.

What happens at maturity (and why it’s worth paying attention)

Maturity is the moment your CD “unlocks.” Your term is complete, and the account is ready for your next step.

At maturity, you typically have options, like:

  • moving the funds to another account,
  • renewing into a new CD,
  • choosing a different term,
  • or splitting the money into multiple goals.

This is also where the grace period comes in. Many CDs give you a short window to make changes after maturity.

And then there’s auto-renewal. If your CD is set to automatically renew, it may roll into a new CD term if you don’t provide instructions. Auto-renewal can be helpful if your plan is “keep saving, keep it simple.” But if your CD was timed to a specific date, like a move or a major purchase, you’ll want to make sure the renewal terms still match your plan.

A small habit that helps: set a calendar reminder a couple weeks before the maturity date. That gives you time to decide whether you want to renew, change terms, or move the money elsewhere.

Choosing a term that matches real life

The best CD term is the one that lines up with when you’ll need the money.

If you’re saving for something you expect within the next year, shorter terms can be a comfortable fit for planned expenses.

If the goal is larger and farther out, like a down payment or a bigger project, then a longer term might make sense.  Just be sure you’re confident you won’t need that money earlier.

The main question to ask is simple: How likely is it that you’ll need this money before the term ends?

If the answer is “there’s a decent chance,” that’s a sign to consider a shorter term or a different approach.

The trade-off: early withdrawal

CDs are designed for money you can leave alone. If you take money out before maturity, many CDs charge an early withdrawal penalty. Often the penalty is described as a certain number of months of interest, but the details vary.

This doesn’t mean CDs are “bad.” It just means the CD works best when the money has a clear timeline and you’re comfortable committing it for the full term.

If flexibility is important, there are a few ways people reduce the risk of needing an early withdrawal:

  • Choose a shorter term that fits the timeline more tightly.
  • Split the total amount into smaller CDs with different maturity dates (so not everything is locked up at once).
  • Consider a no-penalty CD if one is available and the terms fit the goal.

Common CD types you might run into

Most CDs are straightforward: fixed term, stated APY, maturity date.

You may also see variations that adjust the trade-off between flexibility and yield:

  • No-penalty CDs (designed to provide more flexibility)
  • Bump-up or step-up CDs (structured so the rate may increase under certain rules)
  • Jumbo CDs (typically higher minimum deposits)
  • Brokered CDs (available through brokerage platforms; they can work differently than a traditional bank CD)

Not every financial institution offers these options, and the details can vary widely. Since the features can get pretty specific, these CD types are a bit outside the scope of this article: we’re focusing here on how traditional CDs work so you have a solid foundation first.

Where CDs tend to fit best

CDs can be a strong tool when:

  • the money is tied to a planned date,
  • you want a predictable outcome,
  • and you’d rather not think about it every week.

On the flip side, money that might need to cover surprises is usually better kept somewhere more liquid. Many people separate those two buckets: “planned money” vs. “just-in-case money.” CDs are typically a better match for the planned bucket.

The takeaway

A CD is a calendar-based way to save. You pick a term, earn interest at the disclosed APY, and then reach maturity. For money set aside for a specific plan, that structure can be a real benefit: it’s steady, predictable, and easy to leave alone.

Start by choosing a term that matches when you’ll need the money, and the CD can work the way it’s meant to.