Term Deposit

What is a term deposit?

A term deposit (often called a certificate of deposit or CD) is a savings product where you deposit money with a bank or credit union for a fixed period in exchange for a fixed interest rate. Funds are locked until maturity; early withdrawal usually triggers a penalty.

Key takeaways

• Money is locked for a specified term (months to years) in return for a higher interest rate than a regular savings account.
• Term deposits are low risk and typically insured by the FDIC (banks) or NCUA (credit unions).
• Early withdrawal penalties can reduce or eliminate earned interest.
• Laddering multiple term deposits can provide access to funds at staggered intervals.

How it works

You deposit a principal amount and agree not to withdraw it for the term. The bank uses that money for lending or investments and pays you interest. Because access is restricted, banks generally offer higher rates than on liquid accounts. At maturity you receive principal plus interest; you can withdraw, reinvest, or roll the deposit into a new term.

How banks use term deposits

Banks pay depositors a lower rate than the rate they charge borrowers. The difference—net interest margin—is a key source of bank profitability. Banks must balance paying enough to attract depositors and charging competitive loan rates.

Interest rates and timing

• Rates usually increase with longer maturities and larger deposit amounts (e.g., jumbo CDs).
• Rates are influenced by market interest rates: when market rates rise, newly offered term deposits tend to pay more; when rates fall, offered rates drop.
• If rates rise significantly after you lock in a low rate, you face interest rate risk; if inflation outpaces your rate, real returns can be negative.

Opening, closing, and penalties

• Terms, minimum deposits, and penalties are disclosed when you open the account.
• Withdrawing before maturity typically results in forfeited interest or an explicit penalty.
• Near maturity, institutions often offer automatic renewal (rollover) at prevailing rates unless you instruct otherwise.
• Retirement accounts with term deposits may have special tax or penalty rules—consult an advisor before withdrawing early.

Laddering strategy

Laddering spreads a sum across several term deposits with staggered maturities (for example, 1-, 2-, 3-, 4-, and 5-year). One CD matures each year, providing periodic access to funds, more frequent opportunities to reinvest at current rates, and a balance between yield and liquidity. Laddering is useful for retirees or anyone who wants steady access to cash while capturing higher long-term rates.

Pros and cons

Pros
* Fixed, predictable return for the term.
Very low risk—insured by FDIC/NCUA up to coverage limits.
Variety of maturities supports laddering.
* Often higher rates than basic savings accounts, especially for larger deposits.

Cons
* Limited liquidity—early withdrawals incur penalties.
Rates may be lower than other fixed-income or market investments.
Returns can lag inflation.
* You cannot usually add to an existing term deposit after opening.

Simple example

Instead of one five-year deposit, you split the same amount into five CDs maturing in 1–5 years. Each year a CD matures and you decide whether to spend the funds or reinvest into a new five-year CD at current rates.

Explain like I’m 5

You give your money to the bank and promise not to take it out for a set time. The bank keeps it safe and gives you extra money (interest) when the time is up. If you take it out early, you might lose some of the extra money.

Practical uses

• Parking cash you won’t need soon while earning a better rate than a basic savings account.
• Creating predictable, low-risk segments of a retirement portfolio.
• Funding near-term goals where capital preservation is a priority.

Common questions

What is the main disadvantage?
Limited access to funds during the term and potential early withdrawal penalties.

What’s better than a term deposit?
Depends on goals. High-yield savings accounts offer more liquidity and may pay competitive rates. For higher returns (with more risk), consider bonds or diversified investments.

How does a term deposit differ from a certificate of deposit?
They are the same concept; “term deposit” is a general term and “certificate of deposit (CD)” is the common name in some regions.

Bottom line

Term deposits are a simple, low-risk way to earn a fixed return on money you can lock away for a defined period. They suit conservative investors and short- to medium-term savings goals. Be mindful of penalties, inflation risk, and the trade-off between higher long-term rates and shorter-term liquidity.