A term deposit is a banking product in which a customer delivers a certain amount of money to a bank during a period of time established in a contract.
Once that period has run its course, the bank returns the money to the customer along with any returns it may have earned. This product allows banks to raise funds to be able to offer other financial services to their customers, such as mortgages and loans.
With these particular products, banks are able to command a higher return than that they offer to customers who take out a deposit. Therefore, they receive a profit margin between the money they lend and the money deposited by their customers.
The main features of a deposit are as follows:
- Maturity date or term: the length of time agreed upon between customer and bank over which the money will remain on deposit without the customer being able to withdraw it. Upon reaching the maturity date, the customer can withdraw the money plus any interest earned.
- Early repayment: If the customer wants to withdraw the money before the maturity date, they will normally have to pay an early cancellation penalty.
- Return: the agreed interest rate that the customer will receive for holding their money at the bank for a set period of time. When arranging this type of product, it is best to look at the annual equivalent rate (AER), since there are certain expenses that the nominal interest rate does not include.
- Direct debits and other transactions: term deposits do not allow customers to set up direct debits for their bills or other payables and receivables, and nor can they withdraw cash from an ATM on the spot.