When it comes to GICs, there’s one subject that causes a lot of confusion for people: the difference between cashable GICs and redeemable GICs. This is understandable. After all, the terms are very similar and often used interchangeably. It certainly doesn’t help matters that the financial industry uses both words but rarely, if ever, explains how they differ.
Admittedly, cashable and redeemable GICs do share the same basic characteristic: both allow you access to your money before the term has ended. This provides flexibility and peace of mind for those who may need their funds in short order.
But there are some differences.
For many (though not all) cashable GICs, they may be cashed in, but until a set amount of time has elapsed. This period tends to be 30-90 days. After this point, the customer is allowed early access to their funds. Interest is calculated at the advertised rate up the date of cashing. For example, if a 1-year cashable GIC is cashed half-way through the year, interest would be paid for the six months that the product was held. With cashable GICs, there is no penalty for early redemption, after that 30-90 day period is up.
Redeemable GICs are a bit different. They can be cashed in at any time after purchase, unlike cashable GICs where there’s a waiting period. However, with redeemable GICs, they are often subject to early redemption rates.
Let’s say you buy a $5,000 1-year redeemable GIC that promises to pay 0.40% interest. Three months in, you realize you need to buy a new fridge and thus need to redeem your GIC. According to the early redemption schedule provided by the bank, redeeming at the three month mark means you’ll only receive 0.05% in interest.
While we hope this post clears up some of the confusion about cashable vs. redeemable GICs, it is worth mentioning that our explanation is only generally true. Because there is no standard definition of cashable and redeemable GICs among financial institutions, you really need to read the details of a particular product before purchasing it. For instance, some cashable GICs also have early redemption rates, and also can be cashed in at any time.
GICs are usually very straightforward but this is one area where people can easily get mixed up. No need to sweat about it too much, though. As always, focus on finding the best GIC rates and with the redemption feature that’s right for you.
Flickr: Terrance Lam