Demand Deposit vs. Term Deposit — What's the Difference?
By Tayyaba Rehman — Published on January 7, 2024
Demand deposits are funds available on request, while term deposits are held for a fixed period.
Difference Between Demand Deposit and Term Deposit
Table of Contents
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Key Differences
Demand deposits are financial accounts where the deposited funds can be withdrawn at any time without any prior notice to the bank. These are highly liquid assets that are often used for day-to-day transactions. Term deposits, on the other hand, are financial investments where money is locked away for a certain period, during which the depositor cannot access the funds without incurring a penalty.
With demand deposits, the account holder can deposit and withdraw money frequently. These accounts typically earn lower interest rates due to their liquidity. Term deposits are designed for longer-term savings goals, offering higher interest rates in exchange for the commitment to keep the money deposited for the pre-agreed term.
Banks offer demand deposit accounts like checking and savings accounts to individuals and businesses for regular transactions. Such accounts often come with various transactional tools such as debit cards and checks. Conversely, term deposits such as certificates of deposit (CDs) do not offer such transactional tools, as they are not intended for active use but rather for steady growth over time.
Demand deposits are advantageous for their flexibility and ease of access, making them suitable for managing day-to-day financial needs. In contrast, term deposits are beneficial for individuals looking to earn a higher interest rate and who do not require immediate access to their funds.
Financial institutions typically insure demand deposits up to a certain amount, providing security for these funds. Term deposits also offer security, with the added advantage of fixed interest rates that are usually higher than those of demand deposits, giving depositors a predictable return on their investment.
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Comparison Chart
Access
Immediate
Restricted
Rate
Lower interest
Higher interest
Term
No fixed term
Fixed term
Use
Transactional
Savings/investment
Penalty
No penalty for withdrawal
Penalty for early withdrawal
Compare with Definitions
Demand Deposit
A non-term financial account for regular deposits and withdrawals.
The business manages its cash flow through a demand deposit.
Term Deposit
A time-specific deposit that penalizes early withdrawals.
He considered breaking his term deposit to buy a car.
Demand Deposit
A liquid asset that allows for immediate transactions.
The convenience of a demand deposit makes daily spending easy.
Term Deposit
A savings tool with funds inaccessible for a specified term without penalty.
The couple's term deposit is earmarked for their house fund.
Demand Deposit
A bank account for money that can be withdrawn anytime.
I used my demand deposit to pay for groceries.
Term Deposit
A bank account with funds locked for a fixed period.
Their term deposit will mature next year.
Demand Deposit
A checking or savings account with no withdrawal restrictions.
She deposited her paycheck into her demand deposit account.
Term Deposit
An interest-bearing deposit with a set maturity date.
She invested in a term deposit to earn higher interest.
Demand Deposit
Funds accessible on demand for payments and withdrawals.
He transferred money from his demand deposit to cover a bill.
Term Deposit
A deposit held at a financial institution with a fixed return rate.
Investors chose a term deposit for its stable interest rate.
Common Curiosities
Are term deposits risk-free?
Term deposits are generally low-risk, offering fixed interest rates and FDIC insurance up to applicable limits.
What can I use a demand deposit for?
A demand deposit can be used for daily transactions such as paying bills, withdrawing cash, or making purchases.
Is there a minimum balance for demand deposits?
Some demand deposit accounts may have a minimum balance requirement, but it varies by bank.
Can I add more money to a term deposit?
Typically, you cannot add funds to a term deposit until it matures; you would need to open a new one.
What is a demand deposit?
A demand deposit is a bank account from which deposited funds can be withdrawn at any time without any advance notice to the institution.
How quickly can I access my money in a demand deposit?
You can access your money immediately, typically via ATM, checks, or online transfers.
Is a checking account a type of demand deposit?
Yes, checking accounts are a common type of demand deposit, allowing for frequent and immediate access to funds.
Are funds in a demand deposit insured?
Funds in both demand deposits and term deposits are usually insured up to a certain limit by government-backed insurance programs.
What happens if I withdraw from a term deposit early?
Early withdrawal from a term deposit may result in penalties and loss of some interest earnings.
Are term deposits completely illiquid?
While term deposits are less liquid due to the fixed term, many institutions allow early withdrawal with an interest penalty.
Do demand deposits earn interest?
Yes, but the rates are usually lower than those offered on term deposits.
What is a term deposit?
A term deposit is a type of bank account where money is locked in for a specific period, and early withdrawal incurs penalties.
How are term deposits typically used by investors?
Investors often use term deposits for short- to medium-term savings goals due to their fixed interest rates and lower risk.
Which is a safer investment, a demand deposit or a term deposit?
Both are considered safe, especially if they are insured, but term deposits often have guaranteed interest rates making them a more predictable investment.
Can demand deposits earn interest?
Yes, demand deposits can earn interest, but the rates are typically lower than those of term deposits.
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Written by
Tayyaba RehmanTayyaba Rehman is a distinguished writer, currently serving as a primary contributor to askdifference.com. As a researcher in semantics and etymology, Tayyaba's passion for the complexity of languages and their distinctions has found a perfect home on the platform. Tayyaba delves into the intricacies of language, distinguishing between commonly confused words and phrases, thereby providing clarity for readers worldwide.
