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Differences Between Time Deposits and Demand Deposits

By Rebecca Lake · July 07, 2022 · 8 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Differences Between Time Deposits and Demand Deposits

A demand deposit account is a type of bank account that allows you to withdraw money “on demand,” without having to provide advance notice beforehand. Time deposit accounts only allow you to withdraw funds once the account reaches maturity.

Banks and credit unions typically offer both demand deposit and time deposit accounts, though you might know them better as checking and savings accounts (demand deposit accounts) and certificates of deposit, or CDs (a time deposit account).

These two types of accounts are designed to meet different financial goals. Understanding the difference between demand deposits vs. time deposits can help you decide where to put your money.

What Are Time Deposits?

Time deposit accounts are savings accounts that require you to keep your money in the account for a set time frame. They can also be called term deposit accounts or term deposits since the bank can specify the term that the money must stay in place.

If you’d like to withdraw money before the term ends, the bank may allow that. However, they will likely charge you a penalty fee. They may also require you to give them a certain amount of advance, either in writing, in-person, or over the phone. Once you open a time deposit account, you typically can’t add any additional funds at a later date.

How a Time Deposit Works

A time deposit works by effectively “locking in” your money for a set time period or term. During this term, your money can earn interest at a rate specified by the bank.

A certificate of deposit account is the most common type of a time deposit or term deposit account. Banks often offer CDs with varying maturity terms, which can range anywhere from one month to five years or more.

While your money is in the CD, it earns interest. Once the CD matures, you can do one of two things:

•   Roll the principal and interest earned into a new CD with different terms

•   Withdraw the principal and interest earned

If you take money out of the CD before it matures, the bank will likely impose an early withdrawal penalty. This penalty usually involves forfeiting some of the interest earned. The size of the penalty can vary depending on how early you withdraw the money and the length of the CD.

What Are Demand Deposits?

With a demand deposit account, you are allowed to put money into the account or take money out of the account when you want and without giving any advance notice. Demand deposit accounts include checking accounts, savings accounts, and money market accounts.

The money in a demand deposit account is generally considered to be liquid, or ready cash, and you can withdraw any amount (including the entire balance) at any time without paying a penalty. However, some banks may charge a fee if you exceed a certain number of withdrawals from a savings account within one month.

How a Demand Deposit Works

Demand deposit accounts work by allowing you convenient, flexible access to your money. The most common example of a demand deposit account is a checking account. With a checking account, you can deposit money, then access it by:

•   Using a debit card to make purchases online or in stores

•   Withdrawing cash at ATMs or through a teller

•   Scheduling online bill payments

•   Linking it to mobile payment apps

A trade off for this easy access to your money is that demand deposit accounts typically don’t pay high rates of interest, and checking accounts generally don’t pay any interest at all. While you can sometimes find an interest-bearing checking account, checking account interest rates tend to be on the lower side.

There are other types of interest-bearing accounts that fall under the demand deposit umbrella. They include: traditional savings accounts, high-yield savings accounts, money market accounts, and kids’ savings accounts.

Recommended: How Do Calculate Interest on a Savings Account?

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Federal Insurance for Demand and Time Deposits

The Federal Deposit Insurance Corporation (FDIC) provides insurance coverage for member banks, which is passed on to account holders. The FDIC insures both demand and time deposit accounts, including:

•   Checking accounts

•   Savings accounts

•   Money market accounts

•   CD accounts

The standard FDIC coverage limit is $250,000 per depositor, per account ownership type, per financial institution. The National Credit Union Administration (NCUA) offers similar coverage for time and demand deposit accounts held at member credit unions.

Demand Deposit Pros

When comparing demand deposit vs. time deposit accounts, it helps to understand the pros and cons of each type of account.

Here are some of main benefits of demand deposit accounts:

•   They give you access to your money without being required to give the bank advance notice.

•   They offer multiple ways to manage and access money, including online and mobile banking, automated clearing house (ACH) transfers, direct deposit, ATM banking, and branch banking.

•   There is the potential to earn interest on balances and, in some cases, rewards on purchases.

Demand Deposit Cons

While demand deposit accounts can make managing money and growing savings convenient, there are some potential downsides to keep in mind. These include:

•   There may be monthly fees or other fees.

•   Since interest rates can vary, you may need to shop around to find the best rate.

•   Banks may limit the number of withdrawals you’re allowed each month.

Time Deposit Pros

Time deposit accounts can be a great place to keep your savings — if you understand how they work. Here are some of the advantages of opening a time deposit account:

•   They offer a guaranteed rate of interest, so there’s very little risk of losing money.

•   They typically offer a higher interest rate than you can get on a demand deposit account.

•   There are generally no fees if you leave the money in the account until maturity.

Time Deposit Cons

Opening a time deposit account could make sense if you want a place to park your money for several months to years and earn a higher rate of interest. But it’s important to keep these cons in mind:

•   You may pay an early withdrawal penalty if you need to take any or all of the money out prior to maturity.

•   There is often a minimum deposit required.

•   Most time deposit accounts do not allow you to make additional deposits once the account is open.

How to Choose Between a Demand and Time Deposit Account

Demand deposit vs. time deposit: which one should you pick? The answer will depend on your financial needs and goals.

You might choose a demand deposit account if you:

•   Want convenient access to your money via a debit or ATM card, online banking, mobile banking, or at a branch

•   Want to be able to earn some interest on your savings while still having easy access to the money

•   Don’t mind the possibility of paying checking or savings account fees

A time deposit account, on the other hand, may be more appropriate if you:

•   Want to earn a higher interest rate than you can get on a standard checking or savings account at a bank

•   Have a sum of money you don’t need to touch for the immediate future

One good solution is to have a mix of demand deposit accounts and time deposits. This might include a checking account (for paying bills and everyday spending), a savings account (to hold your emergency fund), and one or more CD accounts to fund your longer-term goals. Just be sure to pay attention to minimum balance requirements and fees for each account you open.

When choosing between different types of savings accounts and CDs, you’ll also want to consider the interest rate and the annual percentage yield (APY). The difference between the interest rate vs. APY is that the APY tells you the total amount of interest you earn on the account over one year. While it’s based on the interest rate, the APY also takes into account the compounding interest (when interest accrues on previously accrued interest) to give you the most accurate idea of what you’ll earn in a year.

APY, however, is not to be confused with annual percentage yield, or APR, which refers to what you can owe in interest charges on a loan.

Recommended: Fixed vs. Variable Rate Loans

The Takeaway

There are two key differences between demand deposit and time deposit accounts: how easily you can access the money in the account and how much interest the account earns.

Demand deposit accounts (which include checking accounts, savings accounts and money market accounts) allow you to withdraw money from the account at any time, whereas time deposit accounts (such as CDs) require you to deposit your money for a specific length of time. While demand deposit accounts offer more flexibility, they typically offer lower interest rates than time deposit accounts.

To get the benefits of both worlds, you may want to open an online bank account with SoFi. You’ll be able to easily access your money with mobile banking and our network of 55,000+ fee-free ATMs, and with direct deposit also earning competitive interest. Plus, you won’t pay any monthly fees or other account fees.

Better banking is here with up to 4.00% APY on SoFi Checking and Savings.


What is the difference between demand deposit and time deposit?

The key difference between demand deposit vs. time deposit is access. With demand deposit accounts, you generally access your money at any time without paying a penalty or giving the bank any advance notice. With time deposit accounts, you generally can’t withdraw money until the account reaches maturity.

Which type of deposits with the banks are called demand deposits?

Demand deposit accounts include checking accounts, savings accounts, and money market accounts. Checking accounts can allow you to use a debit card, pay bills online, and manage money through online and mobile banking. Savings accounts are used to hold money you don’t plan to spend right away and may offer interest. Money market accounts combine features of both checking and savings accounts.

Why are demand deposits considered money?

Demand deposit accounts hold money that you can withdraw whenever you want. You can use this account to get cash, pay bills, make purchases, or complete other financial transactions.

Photo credit: iStock/FG Trade

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