It's nothing new for banks to offer gifts to new customers -- a free toaster is the age-old example. However, a bank in Florida has come up with something a little sexier: a new Mercedes in exchange for opening a 5-year CD.
As is often the case with flashy promotions, this one isn't quite as good a deal as it sounds. However, it does say something about today's low-interest-rate environment.
Devil in the details
It's true -- C1 Bank in Florida is offering customers the option of receiving a new Mercedes when they open a new account. But, before you get excited, consider some of the details of this offer.
First of all, it only applies to customers who open a $1 million, 5-year CD. That puts this deal out of reach of the vast majority of bank customers.
Second, the Mercedes isn't exactly a gift. It actually represents the pre-payment of interest on the 5-year CD. In other words, you are exchanging five years of interest on $1 million for a new Mercedes.
There can be some economic value to getting your interest paid in advance, but there is a third catch to this deal. The C1 Bank 5-year CD pays a 1.20 annual percentage yield. That's not bad when 5-year CD rates nationally are averaging 1.10 percent, but you could do even better by shopping around.
The fourth catch is an unusually heavy penalty for early withdrawal. Most CDs will penalize you a portion of your interest if you take your money out before the CD matures. Since this C1 Bank offer effectively pays you your interest upfront, if you want to withdraw your money early they will not only reduce your principal by the purchase price of the car -- effectively confiscating all five years of interest -- but they will also tack on an additional $3,000 penalty.
What it says about CD rates
C1 bank has come up with an attention-getting gimmick, but it is far from certain that anyone will actually take them up on the offer. Still, it is an interesting symptom of the low-interest-rate environment.
With 5-year CD rates barely above 1 percent, the C1 deal attempts to make a low interest rate more attractive, simply by demonstrating what could be bought with five years of interest -- if you have a million dollars to deposit.
This deal is also symptomatic of low interest rates on CDs in what it says about the bank and any customer who would take this deal. For the bank's part, being willing to pay interest in advance indicates just how diminished the time value of money has become with rates so low.
As for the customer, locking into a 5-year CD with such an onerous early-withdrawal penalty would demonstrate a belief that the low-rate era is here to stay. On balance, though, the customer would be better off with a toaster -- if it also came with old-style CD rates.