What Is a Time Deposit?
A time deposit is an interest-bearing bank account that has a pre-set date of maturity. A certificate of deposit (CD) is the best-known example. The money must remain in the account for the fixed term in order to earn the stated interest rate.
Time deposits generally pay a slightly higher rate of interest than a regular savings account. The longer the time to maturity, the higher the interest payment will be.
Another name for this type of investment is term deposit.
Time Deposits Explained
A time deposit such as a CD can be purchased at virtually any bank, credit union, or other financial institution. The interest rates paid vary, as do other terms. For example, one bank may offer a higher return but require a larger deposit.
It pays to shop around. Most post their rates prominently and advertise them widely.
A CD is essentially a savings account that is opened with the promise that the owner won't touch the money for a set period of time. This can range from a few months to years. A term of a year or less is considered a short-term time deposit. Anything over that is a long-term deposit.
Penalties on Early Withdrawals
The owner of a time deposit can withdraw the money out if necessary but will lose some or all of the promised interest and may pay penalty fees. The terms are in the fine print that the saver receives when opening the account.
A customer can earn a slightly higher interest rate with a time deposit account than would be available in a standard savings account or an interest-bearing checking account. The better return is offered because the funds remain locked until the maturity date of the account.
Time deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per investment. Those opened at a credit union carry protection from the National Credit Union Administration (NCUA).
Key Takeaways
- A time deposit is an interest-bearing bank account that has a date of maturity, such as a certificate of deposit (CD).
- The money in a time deposit must be held for the fixed term to receive the interest in full.
- Typically, the longer the term, the higher the interest rate that the depositor receives.
- Time deposits are an extremely safe investment but they have a low rate of return.
Why Banks Offer Time Deposit Accounts
Time deposit accounts provide banks with the cash flow they need to lend money to other customers. The bank makes a profit by lending the funds held in time deposit accounts for a higher interest rate than the rate it pays on the time deposits.
The bank may also invest the money from the time deposit in other securities that pay a higher return than it is paying the customer.
Some Options on Time Deposits
Banks and other financial institutions may accept any maturity term that a customer requests, as long as it is a minimum of 30 days.
Once the investment matures, the funds can be withdrawn without penalty. Or, the investor may choose to renew the time deposit account for another term. For example, a one-year CD could be rolled over into another one-year CD.
Longer Terms Earn Higher Interest
Typically, the longer the term to maturity, the higher the interest rate paid to the depositor. For example, a one-year CD may offer a 1.10% annual percentage yield (APY), while a five-year CD for the same amount might provide a 1.75% APY. The annual percentage yield is the effective annualrate of return (RoR)taking into account the effect ofcompoundinginterest.
Generally, two rates are quoted for time deposits and CDs:
- The interest rate is the percentage interest that the customer would earn if the customer withdrew the interest amount received each month.
- The annual percentage yield (APY) is the amount that the customer will earn if the interest is allowed to remain in the account and compound.
The APY is, therefore, higher than the quoted interest rate.
The Downside of Time Deposits
As with most financial products, there are advantages and disadvantages to time deposit accounts. Above all, they are a safe place to put your money and they're a breeze to obtain.
Like regular bank deposits, time deposits are insured against any losses.
On the other hand, the rate of return is usually lower than that for other investments. The investor could deposit the same amount of money in a bond mutual fund or Treasury bills and earn a higher yield.
There is another risk, especially if the investor chooses a long term for the time deposit. Interest rates may go up over time, while the investor's money is locked into the rate that prevailed when the account was open.
Higher interest rates go hand in hand with higher inflation. So, that investor's money is shrinking while it sits there, in terms of real spending power.
Pros
Time deposits offer investors a fixed interest rate until maturity.
Time deposits are risk-free investments backed by the FDIC or NCUA.
Time deposits have various maturity dates and minimum deposit amounts.
Time deposits pay a higher interest rate than regular savings accounts.
Cons
Time deposit returns are lower than that of other conservative investments.
Investors may miss a better opportunity if interest rates rise.
Depositors can't withdraw their money without a penalty.
Fixed interest rates don't generally keep pace with inflation.
Real-World Examples of Time Deposits
A look at some examples of time deposit returns as of Feb. 9, 2020, offers some insight into the variations among CDs on offer at financial institutions.
- American Express advertised CDs with an APY of 0.55% for one year, 2.05% for three years, or 2.15% for five years. There was no minimum deposit.
- Comenity Direct rates were 2.10% APY for one year, 2.20% for three years, and 2.20% for five years. There was a minimum $1,500 deposit.
- Synchrony Bank rates were 2.00% APY for one year, 2.10% for three years, and 2.15% for five years. There was a minimum deposit of $2,000.
FAQs
A term deposit (also called a time deposit) is a type of deposit account offered by many banks and credit unions. Term deposits have three key features: They earn a guaranteed interest rate. Money in the account earns interest until a set maturity date. The money cannot be withdrawn before maturity without a penalty.
What are time deposits or term deposits? ›
What is time deposit? The terms time deposit and term deposit mean the same thing. It is used to refer to an interest rate-bearing bank account with a fixed term. It allows the depositors to grow money with a higher rate of interest as compared to the regular savings account.
What is a term deposit and how does it work? ›
What Is a Term Deposit? A term deposit is a fixed-term investment that includes the deposit of money into an account at a financial institution. Term deposit investments usually carry short-term maturities ranging from one month to a few years and will have varying levels of required minimum deposits.
How does a time deposit work? ›
A time deposit is an interest-bearing bank account that has a date of maturity, such as a certificate of deposit (CD). The money in a time deposit must be held for the fixed term to receive the interest in full. Typically, the longer the term, the higher the interest rate that the depositor receives.
What is an example of a term deposit? ›
Term Deposit Example
For example, if you choose to invest ₹25,000 for three years at a 7.1% annual interest rate, a cumulative TD would have a maturity value of ₹30,712. Interest is earned at a rate of 7.1% per year. Non-cumulative TDs, on the other hand, pay out interest on a regular basis and lose compounding power.
What are the disadvantages of a term deposit? ›
Disadvantages of term deposits
To earn interest on your term deposit, your money is locked away for a chosen period of time. If you need your money before the term ends, you may have to pay a penalty fee.
What are the two types of time deposits? ›
There are two types of Term Deposits:
- Recurring Deposits.
- Fixed Deposits.
An account owner of time deposits has no free reign to withdraw money. A maturity date is agreed upon when a time deposit account is opened. If money is needed at an earlier date, a penalty fee is deducted from the interest that the money earned from the time deposit.
How much interest rate for time deposit? ›
Interest Rates
| Amount | Tenor |
|---|
| 30 | 91-180 |
| 10,000.00 – 49,999.99 | 0.125% | 0.125% |
| 50,000.00 -249,999.99 | 0.125% | 0.125% |
| 250,000.00 – 499,999.99 | 0.250% | 0.250% |
3 more rowsYou will not be able to readily access your money during the term invested. If you wish to access your money before the term ends you will have to pay an administration fee, miss out on interest which you would otherwise earn and you may need to provide 31 days' notice depending on the type of term deposit.
Term deposits are a safe way to lock away money. But you could earn more by investing it elsewhere. You may be able to earn more money by investing in property or shares, but are at greater risk of losing it.
What is better than a term deposit? ›
Perhaps the biggest benefit of selecting a savings account over a term deposit is being able to access your savings should you need to, while still earning interest.
What is the difference between time deposit and term deposit? ›
Time deposits or term deposits are investment options offered by financial institutions. In a term deposit account, a fixed amount of money is invested for a fixed term at a fixed interest rate. The interest rate on term deposits generally varies, depending on the financial institution.
Should I put my money in a time deposit? ›
Time deposits are considered less risky than stocks or bonds because you are guaranteed a fixed interest as long as you keep the money in the time deposit for the prescribed amount of time.
What bank is best for time deposits? ›
What is the Best Bank for Time Deposits?
| Bank Name | Minimum Placement Amount | Interest Rate |
|---|
| PSBank | ₱10,000 for Peso Time Deposit ₱50,000 for Peso Prime Time Deposit US$1,000 for FCDU Time Deposit | 2.125% to 3.75% 4.5% |
| PNB | ₱10,000 | 0.125% to 1.3% |
| Metrobank | ₱10,000 | Up to 3.5% per annum |
| BPI | ₱50,000 | 0.25% to 0.75% |
8 more rowsMar 15, 2023
When the term deposit matures, you may have the option to add additional funds and roll the funds over for another term, or you may choose to withdraw the money at that point. If you have extra funds to invest, you could consider opening an additional short term deposit account or a high-interest savings account.
What is the interest rate on term deposits? ›
Terms up to 12 months
| Fixed term | Interest rate | Interest paid |
|---|
| 9 months | Interest rate 4.00% p.a. | Interest paid At maturity |
| 10 months | Interest rate 4.00% p.a. | Interest paid At maturity |
| 11 months | Interest rate 4.00% p.a. | Interest paid At maturity |
| 12 months | Interest rate 4.80% p.a. | Interest paid At maturity |
8 more rowsA perfect tool to invest in if you have certain financial goals to fulfil in a stipulated time frame. It is one of the safest investment options available to date. Here the investor need not worry about losing the capital at all.
Can you lose term deposits? ›
Banks do not legally have to allow customers to break term deposits, that is, give back the money early. Whether you can break your deposit will depend on the terms of your contract with the bank. In most cases, you can do so only if the bank agrees.
Can a bank refuse to break a term deposit? ›
Banks would rather not cash out a term deposit early, so they impose some sort of penalty when customers want to break a term deposit. This could be a flat fee, an interest rate reduction, or both. An early withdrawal fee, sometimes called a penalty fee, is a fixed cost, usually around $30.
Term deposits
You may receive a reduction in the interest paid to you. The interest rate that will be applied to the amount you withdraw early will be the advertised rate at the time the term deposit was opened, for the length of time the money was invested, less an interest rate adjustment of 2%1.
How safe are term deposits? ›
While a Term Deposit offers security, the return may not be as high as other higher risk investments, dependant on the size and length of your investment. This is why it's worth researching different financial institutions and their respective interest rates so you can get the most from your investment.
What is a term deposit also known as? ›
Term Deposits, popularly known as Fixed Deposit, is an investment instrument in which a lump-sum sum amount is deposited at an agreed rate of interest for a fixed period of time, ranging from 1 month to 5 years.
Which bank is best for fixed deposits? ›
Best FD Interest Rates in India 2024
| Name | Bank / NBFC | Regular FD Rates |
|---|
| HDFC Bank | Bank | 7.25% |
| Bank of Baroda | Bank | 7.25% |
| IDFC Bank | Bank | 8.00% |
| Kotak Mahindra Bank | Bank | 7.40% |
13 more rowsTime deposit accounts, also called term deposit accounts, require you to deposit your savings for a specific length of time. Although these accounts are less flexible than typical savings accounts, they also tend to earn higher interest rates.
What is the difference between a fixed deposit and a time deposit? ›
While fixed deposits provide a fixed interest rate, time deposits may offer a floating or variable interest rate based on market performance. Additionally, the lock-in period for fixed deposits is often longer than that for time deposits.
How do time deposits differ from savings deposits? ›
You can also add to your savings account whenever you like – either on a regular basis or when you have extra money to put in it. With a term deposit on the other hand, once you've made the initial deposit you won't be able to add any more to the balance until the agreed term has ended.
Is a checking account a time deposit? ›
Demand deposit accounts include checking accounts, savings accounts and money market accounts. With a demand deposit account, you're allowed to put money into the account or take money out of the account at any time, without penalty.
