Most banks accept a variety of types of deposits, and the two primary categories of deposits are demand deposits and time deposits. These, in turn, come in various types. You probably already have a demand deposit account. In fact, you'd include checking and savings accounts if asked to name any two demand deposit products available.
What's a Demand Deposit Account?
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A demand deposit account allows the depositor to withdraw (or "demand") their funds at any time, without prior notice to the bank. This is in contrast to a "time deposit," which always pays interest, is made for a specific length of time, and does not allow the depositor to withdraw the funds until a specified time period has elapsed.
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Types of demand deposits include checking accounts, savings accounts and money market accounts. Demand deposits may or may not pay interest. If they do, the interest rate will be less than the rate paid on time deposits.
Looking at Checking Accounts
Checking accounts are the most common of the types of demand deposits. Most checking accounts do not pay interest, and many banks impose a variety of fees for their use. However, checking accounts are convenient, and offer access to the funds on deposit by writing checks, obtaining cash at ATMs, and using debit cards.
This kind of demand deposit account is normally used to hold short-term funds that will be used to pay for transactions involving goods and services and to obtain easy access to cash when needed.
Exploring Savings Accounts
Savings accounts are another type of demand deposit. Unlike checking accounts, savings accounts always pay interest, which is usually at a fixed rate set by the bank. Savings accounts are usually used to hold funds that will not be needed in the short term. Banks do not normally charge fees to maintain a savings account.
Savings accounts do not offer check-writing privileges, although users can withdraw funds at a branch or ATM. Many banks also offer the capability to transfer funds between savings and checking accounts either online and at ATMs. Some banks also offer "overdraft protection" for checking checking accounts, where funds are automatically withdrawn from a savings account if the depositor exceeds their available balance in a checking account at the same bank.
Considering Money Market Accounts
Money market accounts are also considered demand deposits and are similar to savings accounts. The difference is that the interest rate paid on money market accounts is not fixed and can fluctuate on a daily basis, depending upon changes in short-term interest rates. Like savings accounts, banks do not normally charge fees for money market accounts.
Some money market accounts offer check-writing privileges and ATM access, although many do not. These types of bank deposits normally pay a higher rate of interest than savings accounts, however since the interest rate is not fixed, there may be times when the interest paid on them is lower.
Demand Deposit Account Pros and Cons
The major advantage of a demand deposit account is that it provides quick and easy access to a depositors funds in a variety of ways, including checks, ATMs, branch withdrawals, and online transfers and payments. The major disadvantage is that demand deposits may incur fees and may not pay interest.
Demand deposits are most suitable for depositors who will need short term access to their funds. By contrast, time deposits (such as CDs) normally do not incur fees and always pay higher interest rates than demand deposits, but they do not allow immediate access to funds without payment of a penalty.