What Is a Time Deposit?
Let me explain what a time deposit is: it's a bank account where you lock in your money for a specific period until it matures, and in return, you earn interest. The certificate of deposit, or CD, is the most familiar example of this.
To get the full stated interest rate, you have to keep the money in the account for the entire fixed term until the maturity date. These accounts typically offer a slightly higher interest rate than a regular savings account, and the longer the term to maturity, the higher the interest you'll receive.
You might also hear this called a term deposit.
Key Takeaways
A time deposit, like a CD, is a bank account you hold for a set period to earn a fixed interest rate. You must keep the money in there for the full term to get the interest completely. Usually, longer terms mean higher rates for you as the depositor. These are very safe investments, but they come with low returns.
Understanding Time Deposits
You can buy a time deposit, such as a CD, at almost any bank, credit union, or financial institution. The interest rates and other terms vary, so one place might give you a better rate but ask for a bigger initial deposit.
It makes sense to shop around since most institutions post their rates clearly and advertise them. Essentially, a CD is a savings account you open with the agreement not to touch the money for a set time, which could be months or years. If it's a year or less, it's short-term; more than that, it's long-term.
Penalties on Early Withdrawals
If you need to, you can withdraw the money from a time deposit early, but you'll lose some or all of the promised interest and might face penalty fees. Check the fine print you get when opening the account for the exact terms.
With a time deposit, you earn a bit more interest than in a standard savings or interest-bearing checking account because the funds stay locked until maturity. These deposits are insured by the FDIC up to $250,000 per investment, or by the NCUA if at a credit union.
Why Banks Offer Time Deposit Accounts
Banks use time deposit accounts to get the steady cash they need to lend to other customers. They profit by lending out that money at higher rates than what they pay you on the deposit.
Sometimes, the bank invests the funds in securities that yield more than what they're paying you.
Some Options on Time Deposits
Banks and institutions can set any maturity term you request, as long as it's at least 30 days. Once it matures, you can withdraw the funds without penalty, or roll it over into another term, like turning a one-year CD into a new one-year CD.
Longer Terms Earn Higher Interest
Generally, the longer the term, the higher the interest rate you get. For instance, a one-year CD might offer 3.50% APY, while a five-year one could give 4.50%. The APY accounts for compounding interest, making it the effective annual return.
You'll often see two rates quoted: the simple interest rate if you withdraw interest monthly, and the APY if you leave it to compound, which is higher.
Advantages and Disadvantages of Time Deposits
Time deposits have their ups and downs, like most financial products. They're a safe spot for your money and easy to get, and like regular deposits, they're insured against losses.
However, the returns are usually lower than other investments. You could put the same money in a bond mutual fund or Treasury bills for a better yield. Plus, if you pick a long term and rates rise, you're stuck with the lower rate you locked in.
Higher rates often come with higher inflation, so your money's real buying power could shrink over time.
Pros
- Time deposits offer a fixed interest rate until maturity.
- They're risk-free, backed by FDIC or NCUA.
- Various maturity dates and minimum deposits are available.
- They pay higher interest than regular savings accounts.
Cons
- Returns are lower than other conservative investments.
- You might miss better rates if interest rises.
- Can't withdraw without penalties.
- Fixed rates often don't match inflation.
Real-World Examples of Time Deposits
Looking at rates as of July 1, 2025, shows the differences. American Express offers CDs at 3.50% APY for one year, 3.60% for three years, or 3.75% for five years, with no minimum deposit.
Bread Savings gives 4.00% APY for one, three, or five years, but requires at least $1,500.
Synchrony Bank has 4.00% APY for one and three years, and 4.15% for five years, with no minimum.
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