A term deposit is a specific type of investment/savings account. With a term deposit, the contributor can’t access the funds they deposit until the term ends and the account reaches the maturity date.
Understanding the basics of term deposits is simple because these accounts are pretty straightforward. Individuals who want to use a term deposit will have to open up an account. With the account, they will have to provide the required minimum deposit and wait for the required time period to access their funds. While those funds remain in the account, that deposit will earn interest.
Customers using term deposits won’t be allowed to access the funds from the account before the maturity date; however, sometimes exceptions can be made with a penalty fee.
Generally, term deposits are short-term investments and usually mature within a few months up to a year or two. Many term deposits are considered generally safe investments, especially when working with a bank or a credit union that is insured for these types of accounts. (For banks, this insurance is provided by the Federal Deposit Insurance Corporation (FDIC), and for credit unions, it is provided by the National Credit Administration (NCUA).
What Does Fixed Interest Rate Mean?
As mentioned above, term deposits have a fixed interest rate paid at maturity. A fixed-rate means that the amount of interest you will earn will stay the same throughout the time of the deposit. The opposite of fixed interest is a variable interest rate, which can change over time.
The amount of interest an account holder will earn depends on a few factors, including market conditions, the type of term deposit account, and the financial institution you are working with.
Examples of Term Deposits
Here are some of the common term deposits out there:
Certificate of Deposits (CDs)
CDs are found in banks, credit unions, investment firms, and other thrift institutions throughout the United States. CDs come in several options, so you can find a short or long one depending on your needs. Once it matures, you do have the opportunity to deposit those funds straight into another CD.
Bonds (Kind of)
Bonds technically are not considered term deposits because they aren’t deposits into a traditional account. Instead, they are essentially loan products; what they do have in common with term deposits is that they earn interest over time and will be repaid on the due date.
Time Deposit
A time deposit is an umbrella term for various types of investment accounts, including CDs. What all these accounts have in common is that they will need to mature over time. When looking for term deposit accounts, you will often have to search for time deposit products.
How Do Banks and Other Financial Institutions Use Term Deposits
Banks, credit unions, and other financial institutions use term deposits to lend money to other customers. These types of accounts are actually one of the major ways that banks, credit unions, and similar depository institutions make their money; that margin between the low amount of interest they pay to then get the money they can lend at a much higher interest rate.
For these intuitions, term deposits are more valuable than savings accounts because they can be assured that they will have the funds for a fixed period, rather than with a savings account, which account holders can withdraw from frequently and without warning.
The Ins and Outs of Opening and Closing Term Deposits Accounts
Opening a term deposit account is pretty straightforward; here is how the process will work:
Research Products and Financial institutions
The first step is to do some research on the different financial products available. Consider minimum balance requirements, interest rates, and the required time period in which the funds have to stay in the term deposit account.
Fill Out an Inquiry Form
The next step is to either head to the depository institution’s location or the website you want to work with and fill out an inquiry form for the account. You’ll have to submit some personal information, such as your name and date of birth, and fill out any other paperwork that the bank or credit union requires.
Provide the Deposit
Once the paperwork is completed, you’ll have to provide the funds for the deposit. You may be able to do so via cash, a check, or an electronic transfer.
Wait for the Account to Mature
And finally, the last thing to do is simply wait until the maturity date to withdraw your funds.
Steps to Take After Term Deposit Matures
Once a term account reaches a maturity date, you’ll have a few different options. You can take the funds from the account and use them however you like, you can keep them in the account and extend the maturity date, or you can put them in another type of savings or investment account.
Some Advantages and Disadvantages of Term Deposits
There are definitely some pros and cons to consider with term deposits; below is more information on them:
Advantages of Term Deposits
- The interest earned for term deposits tends to be higher than a standard savings account.
- They can be a good option for those who have a hard time dipping into their savings accounts.
- Term deposits are some of the safest investment accounts out there.
- They can work well with different investment strategies.
- May only require a small initial deposit.
- Adding a term deposit can help build your personal finance portfolio, as it is important to have a wide range of financial products.
Disadvantages of Term Deposits
- Your money is locked for a period of time, and early withdrawals will mean penalties.
- These don’t work best for long-term goals, as for things like retirement, you’ll want to earn more interest to combat the impact of inflation.
- They won’t work well as a primary savings account.
Reference:
Term Deposits | Moneysmart