Term deposit vs sight 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 time deposits differ in terms of accessibility or liquidity, and in the amount of interest that can be charged on deposited funds.
Term deposits, also called term deposits, are investment deposits made for a predetermined period, ranging from a few months to several years. The depositor receives a predetermined interest rate on the term deposit over the specified period. Funds deposited for longer periods command a higher interest rate. Term deposit accounts pay a higher interest rate than traditional savings accounts.
Funds cannot be withdrawn from a term account before the end of the chosen period without incurring a financial penalty, and withdrawals often require written notice. At the end of the period, the depositor has the choice of withdrawing the deposited funds plus the interest earned, or transferring the funds to a new term deposit. The most common form of term deposit is a bank certificate of deposit or CD.
Demand deposit accounts offer greater liquidity and ease of access compared to term deposits, but pay lower interest rates, and they can also include various account management fees. Depositors can withdraw all or part of the funds from a demand deposit account at any time with no penalty or notice required, although some banks charge a nominal fee if you exceed their monthly withdrawal limit.
Funds to which a depositor may need access at any time should be kept in a demand deposit account. Examples of demand deposit accounts include checking accounts, savings accounts, or money market accounts.
[Important: 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.]
Money market, checks or savings?
Money market accounts have low fees and generally offer higher returns than savings accounts, however, fluctuating interest rates mean that no fixed amount of interest is earned on the account.
Chequing accounts generally have higher fees and pay no interest to the cardholder, although some chequing accounts earn a small amount of interest. These accounts are beneficial for people doing a lot of business or those who frequently need access to funds immediately for the purchase of goods or services.
Savings accounts are demand deposit accounts that generally have no fees. Interest rates on savings accounts are fixed and lower than the interest rates available on term deposits.
Current accounts and savings accounts are accessible by the account holder through various banking options, such as teller service, online banking and ATMs.
The Federal Reserve’s Consumer Compliance Manual lists the basic features of demand deposit accounts: no limitations on transfers or withdrawals made by the account holder; no maturity period, or an original maturity of six days or less; funds are paid on demand; the account may not bear interest; and there is no eligibility condition.
Key points to remember
- Demand deposits and term deposits are two different types of deposit accounts at a financial institution.
- Term deposits, also called term deposits, are investment deposits made for a predetermined period, ranging from a few months to several years.
- Demand deposit accounts offer greater liquidity and ease of access compared to term deposits.