Recurring deposit accounts at bank or post offices allow people in many countries to eventually save considerable amounts of money. The system functions as a cost requirement that has to be met monthly, so the saver deposits a steady, consistent amount that can grow with interest. The rate of interest stays stable in such instances, and it typically is higher than for than a simple, liquid savings account. Recurring deposit accounts are used primarily in India.
A traditional recurring deposit account works like a loan to yourself. The saver makes an agreement with a bank to save a set amount of money. The bank then sets terms that the saver must meet, over a given period, by a set amount of payment each month. Common choices run from 12 months to 10 years, with the saver make the same payment to the account monthly.
The payment date can be predetermined any day of the month, but once it is set the saver has to meet the obligation on that particular day. At the end of the time period the saver can decide to redeposit the funds in another account, sign up for another term in the recurring deposit system, or withdraw the funds entirely.
Interest Payment Rates
The interest rate on recurring deposit accounts tends to be higher than on basic, liquid savings accounts, because by design the saved funds are locked. Because there are penalties for early withdrawal, the bank can rely on having the funds, so it pays better interest. The rate is typical flat and does not fluctuate for the life of the account, similar to a fixed rate on a certificate of deposit in the United States.
Because the intent of such an account is to make sure the saver deposits funds regularly, failure to make payments when due leads to penalties that hurt the interest that the account gains. The recurring deposit rate paid is reduced when terms are violated, similar to an early-withdrawal penalty on a CD. Penalties can be imposed for missing a monthly payment or paying late. After several violations, the bank can outright close the account, because the intent of the savings process is not being met.
U.S. banks generally do not offer recurring deposit accounts. Instead, many banks offer general savings accounts with the ability to schedule automatic deposits. These options are frequently named "automatic savings plans." The saver creates the savings account, schedule a deposit to transfer in from another account (usually checking) on a certain date monthly, and the money is deposited when the date arrives. There is no time limit for the life of the savings account, and there are no penalties for missing a payment or choosing not to save for a while (unless the account requires a minimum balance).
- Photo Credit Jupiterimages/BananaStock/Getty Images
Types of ACH Payments
Automated Clearing House (ACH) payments occur daily in the United States and are playing an increasing role in consumer and business financial...
What Does TTEE Mean for Certificate of Deposits?
"TTEE" is an abbreviation for the word "trustee." In the case of the certificate of deposit, the trustee is most likely someone...
The Symptoms of Diabetes in Horses
Diabetes isn’t common among horses, although it can happen. This disorder means that your companion can’t properly process glucose from carbohydrates. Either...