Demand Deposit
What it is
A demand deposit is a bank account from which funds can be withdrawn at any time without advance notice. Common examples are checking accounts and many savings accounts. Because the money is immediately accessible, these accounts prioritize liquidity over high interest.
How it works
- Account holders can withdraw cash, use debit cards, write checks, or transfer funds instantly as long as the account balance covers the transaction.
- Withdrawals can be made in person, at ATMs, or online.
- The money is available “on demand,” so banks must honor withdrawals without prior notice (subject to account balance and legal constraints).
Main features and requirements
- Immediate access: No maturity period or required notice for withdrawals and transfers.
- Interest: Typically low or none. Payment of interest is at the bank’s discretion.
- Fees and minimums: Some accounts impose minimum-balance requirements or monthly fees; many institutions now offer no-fee, no-minimum accounts.
- Joint ownership: Joint-demand accounts allow either owner to deposit or withdraw funds without the other owner’s permission.
- Regulatory note: Demand deposits are a principal component of M1, the narrow money supply measure.
Types of demand deposit accounts
- Checking accounts: The most common DDA, designed for daily transactions.
- Savings accounts: Often treated as DDAs, though some savings accounts may have withdrawal limits.
- Money market accounts (MMAs): Hybrid accounts that may offer higher interest but sometimes limit certain transactions. Whether they’re classified as DDAs can vary.
Demand deposit vs. term deposit
- Demand deposit: Immediate access, low or no interest, high liquidity.
- Term deposit (time deposit, e.g., CD): Funds locked for a set term, higher interest in exchange for reduced liquidity and potential penalties for early withdrawal.
- Money market accounts sit between the two: more interest than basic DDAs but may impose transaction limits.
Terms you may see on statements
- DDA: Typically stands for “demand deposit account” (sometimes “direct debit authorization” for immediate withdrawals).
- NOW account: A negotiable order of withdrawal account that may pay interest while still allowing on-demand access.
Advantages
- Convenience: Immediate access for everyday spending and bill payments.
- Flexibility: No penalties or waiting periods for ordinary withdrawals.
- Suitable for an emergency fund or transaction needs where liquidity is essential.
Key takeaways
- Demand deposits provide on-demand access to funds, making them ideal for daily transactions and liquidity needs.
- They generally offer lower interest than term deposits because of their accessibility.
- Account features (fees, minimum balances, transaction limits) vary by institution; compare options to match your needs.
FAQs
-
What does DDA mean on a bank statement?
It most commonly means “demand deposit account,” indicating funds available for immediate use; it can also refer to a direct debit transaction. -
Are savings accounts demand deposit accounts?
Many savings accounts function as DDAs, though some have restrictions on the number of monthly withdrawals. -
Do demand deposits earn interest?
Some do, but rates are usually low compared with term deposits. Interest policies vary by bank. -
Can joint account owners withdraw independently?
Yes—joint DDA owners can typically deposit or withdraw funds without the other owner’s consent. -
How do MMAs compare to DDAs and CDs?
MMAs are a hybrid: they often offer higher, market-linked interest than basic DDAs but may limit certain transactions and are less liquid than standard demand accounts.