What is a deposit?
Deposit refers to a transaction that involves a transfer of something to another party for safekeeping. In the world of finance, a deposit may refer to a sum of money kept or placed in a bank account, typically to gain interest. It also may refer to a portion of funds that is used as a collateral or security for the delivery of a good.
Deeper definition
The term “deposit” is typically used in financial transactions, but it can be used in other situations. There are two ways to use this term, as a noun and a verb.
- As a noun, banks refer to deposits as a customer’s money held at the bank or other financial institutions.
- As a verb, banks refer to the term “deposit” as the act a person or depositor, adding money to his or her bank account.
In the banking world, there are two general types of deposits. These include demand deposits and time deposits.
- Demand deposit refers to the placement of funds into an account that allows a person, also known as a depositor, to withdraw his or her funds without notice. One common example of a demand deposit is the checking account.
Checking accounts allow depositors to withdraw their funds at any time, and there’s no limit to the number of transactions that depositors can make on their accounts. Even so, this doesn’t mean that the bank can’t charge a fee for every transaction.
- Time deposit is an interest-bearing deposit held by a bank for a fixed term. This time period usually varies from 30 days to about 5 years. In most cases, depositors must give notice prior to withdrawing the funds before the time limit ends.
Banks may charge a penalty if a depositor asks to withdraw before a specified date. Time deposits generally refer to certificates of deposit (CDs) or savings accounts. They may pay higher interest rates compared to demand deposits.
When money is deposited into a bank account, it typically accrues interest. This means that a small percentage of the account’s total is added to the amount of funds already deposited in the account. Interest can be compounded at different rates and intervals, depending on the bank or institution.
Thus, depositors should shop around to find a bank that offers the best interest rates before opening an account. CDs, time deposits and other bank accounts that restrict withdrawals usually offer higher interest rates, which allow depositors to save more money in a short period of time.
Deposit example
You can walk into a local bank and hand checks payable to yourself to a live teller. You also can use an ATM to deposit checks or cash, provided that your bank allows ATM deposits. You also can mail checks to your bank.
Depositors can also make electronic deposits. For instance, if their employer pays them by direct deposit, depositors can get funds transferred directly into their bank accounts.
Also, depositors can deposit checks through a mobile application by simply taking a photo of the check and submitting it to their bank through the app.
Looking for a safer place to deposit your money? Shop today for the best FDIC-insured CD rates.
