Time Deposit (Term Deposit)

What is a time deposit?

A time deposit (also called a term deposit) is a bank account that locks in funds for a set period in exchange for a predetermined interest rate. Certificates of deposit (CDs) are the most common form. To earn the stated rate, the funds must remain in the account until its maturity date.

How it works

• You choose a term (months to years) and deposit funds.
• The bank pays a fixed interest rate for that term.
• At maturity you can withdraw the principal plus earned interest or renew (roll over) the deposit into a new term.
• Early withdrawals typically incur penalties that reduce or eliminate earned interest.

Time deposits usually pay higher rates than regular savings or checking accounts because the bank can rely on the funds being available for a set period.

Interest: rate vs APY

• The interest rate is the nominal percentage paid on the deposit.
• Annual Percentage Yield (APY) reflects the effective annual return including compounding.
  APY is therefore higher than the quoted interest rate when interest compounds. Generally, longer terms pay higher rates.

Safety and insurance

Time deposits at banks are insured by the FDIC up to applicable limits. Deposits at credit unions are protected by the NCUA. This makes time deposits a low-risk cash-management option.

Penalties for early withdrawal

Most time deposits allow withdrawals before maturity but impose penalties—often forfeiture of some or all interest plus possible fees. Terms and penalty amounts vary by institution and are disclosed at account opening.

Why banks offer time deposits

Banks use time deposits as a stable source of funds to lend or invest. They typically profit by paying a lower rate to depositors than the return they earn from lending or investing those funds.

Options and flexibility

• Maturities can range from 30 days to several years.
• Minimum deposit requirements vary by institution—some have none, others require a minimum amount.
• At maturity you can withdraw funds, renew the same term, or choose a different term.

Pros and cons

Pros
* Fixed, predictable interest until maturity.
Low risk—insured by FDIC or NCUA.
Simple to open and manage.
* Typically higher yields than regular savings accounts.

Cons
* Lower returns than many other conservative investments (e.g., bond funds, Treasury bills).
Money is illiquid for the term without penalty.
Fixed rates can lag rising market rates, exposing deposits to inflation risk.

Example advertised rates (varies by institution)

Rates change frequently; institutions commonly offer different APYs by term and may require a minimum deposit. Example offerings from various banks include one- to five-year APYs in the mid-single digits, with some banks requiring minimum deposits and others not.

Key takeaways

• Time deposits lock money for a set term in exchange for a fixed interest rate.
• They are safe, insured instruments with predictable returns but reduced liquidity.
• Shop around for the best APY, consider term length versus your liquidity needs, and read early-withdrawal penalties before opening an account.