What Is a Deposit?

What Is a Deposit?

Let me explain what a deposit really means. It's money you add to a bank account for safekeeping or to earn interest. It can also be a partial payment to secure goods or services, like a security deposit on a rental property.

In more detail, a deposit is money held in a bank account or with another financial institution, involving a transfer from one party to another. It can also refer to funds used as security or collateral for delivering goods or services.

How a Deposit Works

A deposit is essentially your money that you transfer to another party, such as when you move funds into a checking account at a bank or credit union.

When you deposit money into a bank account, you can withdraw it anytime, transfer it to another person’s account, or use it to make purchases.

Banks might also offer separate business accounts. Business banking, also called corporate or commercial banking, is designed to meet the needs of businesses. These allow for deposits and withdrawals, just like personal accounts, but often with different limits. Some business accounts let employees deposit or withdraw funds. Banks offering business accounts frequently have night depositories, which are secured lockboxes for depositing cash and checks when the bank is closed.

Often, you must deposit a certain amount of money, called the minimum deposit, to open a new bank account. Depositing money into a checking account qualifies as a transaction deposit, meaning the funds are immediately available and liquid, and you can withdraw them without delays.

The other definition of deposit is when a portion of funds is used as security or collateral for the delivery of a good. Some contracts require a percentage of funds to be paid before delivery as an act of good faith. For example, brokerage firms often require traders to make an initial margin deposit to enter into a new futures contract.

Here's something important: When you deposit money into some bank accounts, it can earn interest. This means that, at fixed intervals, a small percentage of the account’s total is added to the amount already in the account. Interest can compound at different rates and frequencies, depending on the bank's terms.

Types of Deposits

There are two main types of deposits: demand and time.

A demand deposit is a conventional bank checking or savings account. You can withdraw the money anytime from a demand deposit account without advance notice.

Time deposits are those with a fixed time and usually pay a fixed interest rate, like a certificate of deposit (CD). These interest-earning accounts offer higher rates than savings accounts. However, time deposit accounts require that money be kept in the account for a set period of time.

Example of a Deposit

Deposits are often required on many large purchases, such as real estate or vehicles, where sellers require payment plans. Financing companies typically set these deposits at a certain percentage of the full purchase price. A down payment on a home is essentially a deposit.

You may have to pay a deposit in many rental scenarios, whether you're renting an apartment, car, or another product. This is called the security deposit. Its function is to cover any costs associated with potential damage done to the property or asset during the rental period. A partial or total refund is applied after the property or asset is verified at the end of the rental period.

Does Every Deposit Made to a Bank Earn Interest?

Not all deposits to a bank account earn interest. Interest is determined by the terms of the account. Many checking accounts do not provide interest, while most savings accounts and certificates of deposit (CDs) do.

Can I Make a Deposit Using a Check From Another Bank?

You can make a deposit with a check from one bank to another. Most banks will take deposits in the form of cash, checks, money orders, or cashier’s checks. If you’re using a check to open an account, there may be a holding period as the new bank ensures the check will clear.

When I Place a Deposit For Goods or Services, Do I Get the Money Back?

This depends on your agreement. In many rental agreements, a security deposit is held to ensure there is no damage to the property. This may also be the case in renting equipment. The deposit may be returned if the item or space is returned in the same condition. For other items, a deposit may be used as a partial payment on the balance due.

The Bottom Line

A deposit in finance is typically when you transfer money to a bank account, like a checking account, for safekeeping. However, it can have other meanings as well. For example, you may need to place a deposit, or a certain amount of money, with a business to secure goods or services, such as for a rental.