Term Deposit vs. Demand Deposit: An Overview
- Demand deposits and term deposits refer to two different types of deposit accounts available at a bank or similar financial institution, such as a credit union. Demand deposits and term deposits differ in terms of accessibility or liquidity, and in the amount of interest that can be earned on the deposited funds.
- Term deposits, also known as time deposits, are investment deposits made for a predetermined period, ranging from a few months to several years. The depositor receives a predetermined rate of interest on the term deposit over the specified period. Funds deposited for longer periods command a higher interest rate. Term deposit accounts pay a higher rate of interest than traditional savings accounts.
- Funds cannot be withdrawn from a term deposit account until the end of the chosen period without incurring a financial penalty, and withdrawals often require written notice in advance. At the end of the period, the depositor has the choice of withdrawing deposited funds plus earned interest, or rolling over the funds into a new term deposit. The most common form of a term deposit is a bank certificate of deposit or CD.
- Demand deposit accounts offer greater liquidity and ease of access as compared to term deposits but pay lower interest rates, and they may also include various fees for handling the account.
- Depositors can withdraw any or all of the funds in a demand deposit account at any time without penalty or prior notice required, although some banks charge a small fee if you exceed their limit of monthly withdrawals.
- Funds a depositor may need to access at any time should be kept in a demand deposit account. Examples of demand deposit accounts include regular checking accounts, savings accounts, or money market accounts.
Note: Demand deposits and term deposits differ in terms of accessibility or liquidity, and in the amount of interest that can be earned on the deposited funds.
- Demand deposits provide the money consumers need for purchasing daily expenses, where funds can be withdrawn at any time from the depository institution.
- Demand deposit accounts can have joint owners, where both owners must sign to open the account, but only one account holder has to sign to close the account.
- Money market accounts, or other accounts that limit withdrawals or deposits, aren’t demand deposit accounts.