During your banking or finance career, you will most likely hear term deposits. Deposits can have different meanings depending on the industry, but in banking it refers to the amount of money the bank holds for customers. In this article, let's explain what Deposit is, learn more about different deposit types, and show how they work.
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1. What is Deposit?
In the banking industry, term deposit refers to money or assets that banks hold for customers. When customers deposit money, they deposit the money in the bank. Banks hold money for customers for a certain period of time with certain conditions.
Bank deposits can be demand deposits or term deposits. With the form of demand deposit, customers can withdraw money from the account at any time without paying any fees. In a time deposit, customers have to wait a certain amount of time before they can withdraw their funds. If they withdraw money early, they usually have to pay a fee to the bank.
What is Deposit?
Customers or clients can deposit money into multiple account types. Including:
Checking Account: A checking account is a standard demand deposit account. Customers can deposit cash or check into the checking account. Some customers can use direct deposit to have their employers automatically deposit their paychecks into a checking account.
Savings Account: A savings account is a demand deposit account that earns interest over time. When customers deposit money, the bank pays them a certain percentage of interest in exchange for keeping their money.
Money Market Accounts: Money market accounts are similar to savings accounts, but customers can write checks to withdraw money. Clients can deposit to this account and withdraw funds a certain number of times per month. Typically, these accounts earn the same or higher interest rates as savings accounts.
Certificate of deposit (CD): CD is a type of time deposit account. Banks call this account a CD, but credit unions may use a term savings certificate. The customer deposits money on the CD for a certain period of time. After the time is up, the client can withdraw the capital and earn interest.
Individual Retirement Account CD: In this term deposit account, customers deposit money to save for their retirement. They earn interest over time and they can withdraw without charge on a certain date.
2. How do Deposits work?
Bank deposits operate through a system of agreements and regulations. When a customer deposits money in a bank, the bank agrees to hold the money for the customer. The bank or credit union gives instructions on how much and when to deposit the money. For example, a bank might set a money market account limit. The client must make an initial deposit before this type of account can be opened. They can also state how and when customers can withdraw funds.
How do Deposits work?
While holding the deposit, the funds become the property of the bank. This means that banks can use the money when they have assets. For example, they use the funds to pay for other customers' withdrawals. The customer's deposit account is part of the bank's responsibility. This means that the bank is responsible for the money in the customer's account. On a set date, they need to be able to return the money and pay any interest.
Depending on the bank or financial institution, customers can deposit money in a number of ways, including:
In person: Customers can go to a bank branch and deposit cash or check directly into their account.
Through an automatic teller machine (ATM): For some accounts, customers can deposit money through an ATM.
By mail: Some banks accept paper checks by mail. They deposit money from the check into the customer's account.
Electronic: Customers can deposit money online. This includes direct deposits and electronic payments. For example, when a customer uses direct deposit, their employer sends a paycheck directly to the bank. The bank takes cryptocurrencies from the employer and transfers them to the customer's account.
When a customer withdraws part or all of their funds, the bank may pay them interest depending on the type of account. Banks may set an interest rate for different account types. For example, your financial institution may offer multiple levels of savings accounts with varying interest rates. Typically, higher interest accounts require more money in the initial deposit.
3. Types of deposit (deposit)
In the banking world, there are two types of Deposit. These include demand deposits and time deposits.
Types of deposit (deposit)
Demand deposit refers to placing money in an account that allows a person, also known as the depositor, to withdraw his or her funds without notice. A common example of a demand deposit is a checking account.
Checking accounts allow depositors to withdraw their funds at any time and there is no limit to the number of transactions that depositors can make on their account. However, this does not mean that the bank cannot charge a fee for every transaction.
A term deposit is an interest-bearing deposit held by a bank for a fixed term. This period usually varies from 30 days to about 5 years. In most cases, depositors must give notice before withdrawing before the deadline ends.
Banks may charge a fee if a depositor requests a withdrawal by a specific date. Term deposits usually refer to certificates of deposit (CDs) or savings accounts. They may pay higher interest rates than demand deposits.
When money is deposited into a bank account, it usually accrues interest. This means that a small percentage of the total account is added to the amount deposited into the account. Interest may be compounded at different rates and intervals, depending on the bank or institution.
So depositors should shop around to find the bank with the best interest rate before opening an account. CDs, time deposits, and other restricted bank accounts often offer higher interest rates, allowing depositors to save more money in a short period of time.
4. Bank Deposit Example
Here are two hypothetical examples of common bank deposits you may see in your finance or banking career:
Example of a bank deposit
Example 1
Bill Gomez is a customer of ABC Bank. He wants to deposit $100 in cash into his checking account. He went to his local branch and handed the money over to the bank teller. The teller deposited money into Bill's checking account. Money is now the property of the bank. This means that ABC Bank can use the money for other purposes, such as making payments to other customers.
The following week, Bill returned to ABC Bank and wanted to withdraw $50 in cash. The bank takes $50 from their fund and pays this in cash to Bill. They reduced their assets and liabilities by $50. Now they have $50 less cash, which is an asset, and they reduce the amount they owe Bill to $50, which is a liability.
Example 2
Stacey Franklin wants to play a CD with Better Banks. She visits her local branch and explores her options. The bank offers different terms for its CDs. The longer the term of the CD, the higher the interest rate. Stacey opened a three-year CD. She deposits $500 on a CD with 1% interest.
During this time, the bank had Stacey's funds. For three years, she can collect her money without penalty. She will receive her initial $500 and the interest she has accrued for three years.
Thus, the information in this article will be able to help you understand what Deposit is. Hopefully with these shares, you will choose a suitable asset to use in today's banks.
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