What is a Bank Term Deposit?

A bank term deposit is a deposit of funds into a financial institution with the understanding that the funds will not be available for withdrawal for a set period of time. The customer is lending money to the bank, and in exchange receives interest on the deposited funds. Also known as a time deposit or certificate of deposit, bank term deposits can be used as a method of saving money while earning interest or as part of an investment portfolio. This method of savings and investment is very reliable and safe, although the earnings tend to be low.

Customers can use a bank term deposit for a variety of purposes. Many people are saving money for a specific purpose or have available funds they don't need ready access to and would like those funds to earn some money, rather than sitting uselessly in an on-demand deposit account where they can take out money any time. This can be a useful way to set aside money for college and other potential life expenses.

The length of a bank term deposit varies. The longer a customer is willing to lend money to the bank, the better the interest rate, usually. Some are as short as six months and others may be five years or longer. Sometimes the interest is deposited back into the account and periodically compounded while in other cases people receive interest payments, accessing the money earned by the bank term deposit while the money is still being used by the bank.

If customers need to access funds in a bank term deposit because of an emergency, this is possible, but people will usually need to pay a fee. Some allow one penalty-free withdrawal in special circumstances, while others collect the fee every time. This is designed to serve as a disincentive for taking money out early, and can be a significant drawback to a bank term deposit. This is a fixed, illiquid investment. If other investment opportunities come up, people will have to balance the cost of the penalty with the benefits of the other investment.

Banks make information about their bank term deposit rates readily available, and people can usually get them on handouts at the bank or on a bank website. It is advisable to compare rates from several financial institutions. People who have an established relationship with one bank may be able to use comparable rates to negotiate a special deal on interest, especially if they are planning on depositing a large amount of money.