What Is a Time Deposit Account? - Definition & Example

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  • 0:00 What Are Time Deposits?
  • 0:55 Demand Deposit
  • 1:54 Advantages Of A Time Deposit
  • 3:00 Disadvantages Of A…
  • 3:35 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, you will learn the definition of a time deposit and the purpose of interest. We'll explore a demand deposit and discuss the advantages and disadvantages of a time deposit.

What Are Time Deposits?

Do you know why people keep their money in the bank rather than under the mattress or a secret hiding place in their house? Well, there are a couple of good reasons. One such reason is that a bank keeps their money safe in the event of theft, fire or natural disaster. Another reason is that banks pay interest to deposit money.

Interest is a dollar amount given to you for depositing your money in the bank. There are several types of bank products that pay interest, some more than others, such as a time deposit. A time deposit is a depository account offered by a financial institution that pays interest if the money remains in the account for a specified period of time. Let's discuss an account you're probably more familiar with, a demand deposit account, which will make it easier to understand the characteristics of a time deposit. Then we'll define time deposit and discuss the advantages and disadvantages.

Demand Deposit

Before we discuss a time deposit, we must explore a traditional checking and savings account called demand deposit. If you have an account at a bank, you probably have a demand deposit account. A demand deposit is an account where you can deposit money and withdraw money at any time by going to the bank and completing a withdrawal slip or withdrawing your money from an ATM. Nevertheless, the bank has to give you the money immediately.

A demand deposit allows for access to your money when you need it, anytime. Since the bank has no control when you will withdraw your money, they will pay you a small amount of interest based on your account balance and the amount of time you leave the money in the bank. If you're interested in a higher interest rate product, a time deposit may be for you.

A time deposit allows you to deposit money in an account for a required specific period of time. Historically, time deposits have been short-term, meaning less than one year. However, some time deposit periods can extend for more than a year.

Advantages of a Time Deposit

There are several advantages of a time deposit. The first is the fact that they provide a higher interest rate than a demand deposit. When you have extra cash, it makes sense to open a time deposit to receive a higher return on your money.

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