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Demand deposits and term deposits refer to two different types of deposit accounts available at a bank or similar financial institution, such as a credit union. Demand deposits and term deposits differ in terms of accessibility or liquidity, and in the amount of interest that can be earned on the deposited funds.

Term Deposits

Term deposits, also known as time deposits, are investment deposits made for a predetermined period of time, ranging from a few months to several years. The depositor receives a predetermined rate of interest on the term deposit over the specified time period. Funds deposited for longer time periods command a higher interest rate. Term deposit accounts pay a higher rate of interest than traditional savings accounts.

Funds cannot be withdrawn from a term deposit account until the end of the chosen time period without incurring a financial penalty, and withdrawals often require written notice in advance. At the end of the time period, the depositor has the choice of withdrawing deposited funds plus earned interest, or rolling over the funds into a new term deposit. The most common form of a term deposit is a bank certificate of deposit, or CD.

Demand Deposits

Demand deposit accounts offer greater liquidity and ease of access as compared to term deposits but pay lower interest rates, and they may also include various fees for handling the account. Depositors can withdraw any or all of the funds in a demand deposit account at any time without penalty or prior notice required.

Funds a depositor may need to access at any time that provide the depositor with sufficient personal liquidity to handle his or her regular expenses should be kept in a demand deposit account. Examples of demand deposit accounts include regular checking accounts, savings accounts or money market accounts.

Money Market, Checking, or Savings?

Money market accounts have low fees and generally offer higher returns than savings accounts; however, the fluctuation of interest rates means no fixed amount of interest is earned on the account.

Checking accounts typically have higher fees and do not pay any interest to the holder, although some checking accounts earn a slight amount of interest. These accounts are favorable for individuals doing a lot of business or those who frequently need to access funds immediately for the purchasing of goods or services.

Savings accounts are demand deposit accounts that typically have no fees attached. Interest rates on savings accounts are fixed and lower than interest rates available on time deposits.

Both checking and savings accounts are accessible by the account holder through various banking options such as teller service, online banking and ATMs.

The Federal Reserve’s Consumer Compliance Handbook lists the basic characteristics of demand deposit accounts: no limitations on transfers or withdrawals made by the account holder; no maturity period, or an original maturity of six days or less; funds are paid on demand; the account has the potential to bear interest; and there are no eligibility requirements. 

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