What is an early withdrawal penalty?

An early withdrawal penalty refers specifically to a fee that is incurred when a customer withdraws funds from a time deposit account, such as a certificate of deposit (CD), before it reaches its maturity date. Time accounts generally offer a higher interest rate in exchange for keeping the funds deposited for a specified period of time. If funds are withdrawn early, the institution imposes this penalty to protect its expected earnings from those funds, as they had anticipated being able to use that money for a designated period. As a result, the penalty serves as a deterrent for customers, encouraging them to keep their money in the account for the agreed term and adhere to the commitment made when opening the account.

This understanding of early withdrawal penalties is essential for consumers to make informed decisions about their investments and to be aware of the financial implications of accessing their funds prematurely.