Why do financial institutions provide higher interest rates for Certificates of Deposit (CDs)?

Financial institutions offer higher interest rates for Certificates of Deposit (CDs) primarily because these accounts require you to commit your funds for a fixed period of time. When you deposit money in a CD, you agree not to withdraw it until the maturity date, which can range from a few months to several years. This predictability allows banks and credit unions to use your funds for lending and investment over that set term.

In return for this commitment and the limitation on immediate access to your money, institutions can afford to provide a higher interest rate compared to regular savings accounts, which offer more liquidity and flexibility for the depositor. This arrangement benefits both parties: the institution secures funds for investment, and the depositor earns a more attractive return on their savings.