Time Deposit

Beginner

Also known as: Term Deposit

A time deposit is money placed in a bank for a fixed period, such as six months or five years, in exchange for a set interest rate. Withdrawing it early usually involves a penalty or is not allowed.

By agreeing to leave money untouched for a set term, depositors usually earn a higher interest rate than on an ordinary savings or current account. The bank benefits from knowing it can use the money for that period.

For example, a bank might offer 2% on instant-access savings but 4% on a two-year time deposit. A deposit of 10,000 at 4% a year, with interest compounded annually, would grow to about 10,816 after two years.

At the end of the term, called maturity, the depositor can withdraw the money with interest or reinvest it for another term.

Time deposits are low-risk, especially when covered by deposit insurance, and provide certainty about returns. The main trade-offs are reduced flexibility and the risk that interest rates rise after the deposit is made, leaving the depositor locked into a lower rate.

Note: Term deposit means the same as time deposit. "Term deposit" is common in countries such as Australia, New Zealand and India.

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