Deposit

Deposit Explained: Definition, Types, and Examples

What is a deposit?

A deposit is money transferred to another party for safekeeping or as security. Commonly, it refers to funds placed in a bank or credit union account. It can also mean a partial payment or collateral required to secure goods, services, rentals, or financial contracts.

How deposits work

• When you deposit funds into an account (checking, savings, or business), the money is recorded by the financial institution and becomes available according to the account’s rules.
• Deposited funds can be withdrawn, transferred, or used to make payments. Some accounts allow immediate access; others restrict withdrawals for a set period.
• Deposits provide security to the depositor and allow banks to use the funds for lending and other activities.
• Some accounts pay interest on deposits. Interest may compound at different frequencies depending on account terms.
• Businesses often use specialized accounts with different limits and services (e.g., night depositories for after-hours cash deposits).

Types of deposits

• Demand deposits: Funds in checking or many savings accounts that are available on demand—withdrawable without advance notice.
• Time deposits: Funds that must remain in an account for a fixed term and typically earn a higher, fixed interest rate. Certificates of deposit (CDs) are a common example. Withdrawing early often incurs penalties.
• Security deposits: Payments held as collateral for rental properties, equipment, or services to cover damage or unpaid charges. These are refundable if conditions are met.
• Margin or initial deposits: Funds required by brokerages or financiers to open leveraged positions (e.g., futures contracts, margin accounts).

Practical examples

• Down payment on a home or vehicle: A percentage of the purchase price paid upfront to secure the transaction and reduce loan size.
• Rental security deposit: Held to cover potential damage; refunded (partially or fully) after inspection and any allowable deductions.
• Business deposits: Cash or checks placed in a commercial account, sometimes using night depositories when banks are closed.
• Brokerage margin deposit: Initial collateral required to open certain trades or positions.

Common questions

• Do all bank deposits earn interest?
  No. Interest depends on the account type and terms. Many checking accounts do not pay interest, while most savings accounts, CDs, and other time deposits do.
• Can I deposit a check from another bank?
  Yes. Banks accept cash, checks, money orders, and cashier’s checks. A hold period may apply while the check clears, especially for new accounts.
• Will I get my deposit back if I paid one for goods or services?
  It depends on the agreement. Security deposits are often refundable if the item or property is returned in acceptable condition. Deposits used as partial payments generally reduce the remaining balance rather than being returned.

Key takeaways

• A deposit is either money placed in a financial account for safekeeping or a payment held as collateral.
• Demand deposits offer immediate access; time deposits require funds to remain for a set term and usually earn higher interest.
• Not all deposits earn interest; account terms determine interest and availability.
• Deposits are commonly used in banking, rentals, purchases, and brokerage transactions.

Bottom line

Deposits are fundamental to everyday finance: they protect your funds, enable transactions, and serve as collateral in many agreements. When choosing an account or entering a contract that requires a deposit, review access rules, interest terms, minimums, and refund or penalty conditions to ensure it fits your needs.