The Difference Between Demand Deposits and Term Deposits

Lauren WardUpdated August 4, 2023

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A demand deposit account is a bank account where account holders can readily access their funds without penalty. A term deposit, on the other hand, requires account holders to deposit their money for a specific amount of time in order to access higher interest rates. In this article, we discuss the benefits and drawbacks of demand deposits and term deposits, how they compare with each other, and things you should consider when deciding which one to use.

What Is a Demand Deposit Account?

A demand deposit account is a bank account where the account holder is able to withdraw and deposit funds as they wish on demand. The money is readily available if and when needed. Demand deposit examples include:

Money market accounts
Savings accounts
Checking accounts
Share draft accounts
Share savings accounts

In the past, there were limits on the number of times an account holder could withdraw funds from their savings account without receiving a fee from their financial institution. Prior to COVID, Regulation D limited that number to six times per month. However, since April 24, 2020, the Fed now allows an unlimited amount per month. Some banks and credit unions may continue to have unique in-house rules, but those rules are not mandated by the Federal Reserve. Recommended: Money Market Accounts vs Savings Accounts

Benefits and Drawbacks of DDA

Benefits of a Demand Deposit Account:	Drawbacks of a Demand Deposit Account:
• Access to funds when needed• Funds are likely insured by the FDIC• Account holder can set up direct deposit with employer	• Lower APY than other options on the market• Bank or credit union may charge monthly fees• Some DDAs don’t pay any interest

What Is a Term Deposit Account?

A term deposit account, also known as a time deposit account, is an account offered by many financial institutions where the account holder makes a deposit and leaves the money within the account for a set amount of time. Compared to DDAs, the interest rates on term deposit accounts are often more favorable.

Example of a Term Deposit Account

A CD, or certificate of deposit, is a prime example of a term deposit. With a CD, account holders deposit a sum of money to a financial institution and must leave that money until the term has ended to receive a return on their deposit. Term lengths vary depending on the institution. They can be as short as one month to as long as five years or more. The interest rate changes depending on the term length. Higher rates are often found with longer term lengths spanning a few years or more. Before purchasing a CD, it’s important to understand that you won’t have access to the funds until the CD has fully matured. If you withdraw your funds early, then you may have to pay a fee and you may lose any interest your deposit has earned.

Differences Between Demand and Term Deposits

The primary difference between a demand deposit and a term deposit is access to funds. With demand deposit accounts, account holders can easily deposit and withdraw funds as many times as needed, provided they have the necessary funds. And, even if they overdraw from their account, many banks and credit unions offer overdraft protection. Term deposits usually don’t allow for any withdrawals without the account holder suffering some sort of penalty — they may lose any interest they’ve accrued on their money and they may have to pay a fee. They can regain access to their funds, but it’s often not to their benefit to do so before the deposit has fully matured. The next key difference between DDAs and term deposits are interest rates. Checking accounts often don’t offer any returns, and while savings accounts do, the rates can be low when compared to term deposits. If there is interest, the money may compound monthly, quarterly, or yearly, but it depends on the bank and the account Term deposits, on the other hand, often pay higher interest than DDAs, but the amount of interest varies depending on the product and institution. To receive interest on a term deposit, the funds must be left with the financial institution for a specified period of time. Interest is not paid until the term has ended.

How to Open a Demand or Term Deposit Account

An easy way to open either account is to go to a nearby bank or credit union. Another option is to open a bank account online. These days, it’s more than possible to do a majority of your banking online, so don’t restrict yourself to only banks that have physical locations in your area. To open either a DDA or term deposit account, do research on the banks, credit unions, and online banks that offer the best rates with the lowest (if any) monthly fees. While you may not be interested in APY, there’s no reason not to include that in your decision-making process. High interest savings accounts can often compete, if not beat, term deposit accounts when it comes to returns. Once you’ve found an account you’re interested in opening, you will need to submit an application, which should only take a few minutes to do online. You will likely need to make an initial deposit, so you will need to provide your current bank information (routing and account number) to the new bank to initiate a money transfer.

The Takeaway

A demand deposit account allows account holders access to their personal funds on an as-needed basis. There is no penalty or fee for accessing the money. For term deposits, there is a fee if you withdraw your money before the term is finished. The benefit, however, is a higher APY. Which one is best will depend on your financial situation and your daily liquidity needs. If you’re attracted to term deposits because of the higher APY, you may want to consider a high interest savings account. High interest savings accounts allow you to earn interest on your money, but still have access to it at any given time.Lantern can help you compare high interest online savings accounts and find today’s best rate.

Frequently Asked Questions

What is the minimum deposit required for a term deposit account?

Can I withdraw money from a term deposit account before maturity?

What happens if I withdraw money from a demand deposit account too frequently?

Photo credit: iStock/Rockaa

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About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

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