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How do GICs work?

GIC fees Add to ...

There are no fees or charges to buy or hold GICs. Your bank covers its costs when it sets its GIC rates. But you may have to pay a penalty if you want to cash in your GIC early.

Penalties for cashing in early

If you want your money back before the term ends, you may receive less interest or have to pay a penalty. Make sure you understand what these penalties are before you buy a GIC.

If you think you may need your money early, consider buying a cashable or redeemable GIC. You won't have to pay a penalty to cash in these GICs early, but the interest rate may be lower.

How banks make money selling GICs

When you invest in a GIC at a financial institution, such as a bank, you lend it your money for a period of time. The bank pays you interest. At the same time, the bank is able to lend your money to others. The bank will charge a higher rate to those borrowing the money.

The bank makes money on the difference between the interest it pays to you, and the interest it charges to the borrowers. This is known as the spread. The money earned on the spread helps the bank cover its costs and make a small profit. So, even though there is no fee when you buy a GIC, the bank still makes money using your money.

Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca

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