November 9, 2023

What Is a Term Deposit, and How Does It Work?

Beyond your typical checking and savings accounts, there’s a lesser-known gem in financial returns. Welcome to the world of term deposits, where your money can take a little vacation and return with some new friends—a few extra bucks in interest earnings.

That said, term deposits are a little more complicated than your average vacation, and understanding how they work so you can make the best savings and investment decisions is essential.

Here we’ll explain what term deposits are, their pros and cons, and what to consider when closing a term deposit.

What are term deposits?

Term deposits are fixed-term investment vehicles (basically special savings accounts) where you put away a chunk of money for a set period of time — say, a few months or years — with the promise not to touch it. In return, the bank offers you a fixed interest rate that's often higher than what regular savings accounts provide. Sometimes also referred to as certificates of deposit (CDs), they’re a simple way to earn more on your savings without any surprises.

How do term deposits work?

Term deposit accounts are easy to set up, but the exact duration of the term often differs. During this period, your money stays put and grows. Even better, the growth is guaranteed, but there's a catch: If you decide to take out your money earlier than agreed, you might have to pay a penalty or give up some of the interest you've earned. Once the agreed-upon time is up, you get your original money back with interest.

This makes term deposits a fantastic option for people with savings goals and a clear idea of when they’ll need their money. For example, if you’re saving for a new car, a house, or some similar large purchase, a term deposit could be a great way to help you reach that milestone.

Pros and cons of term deposits

Term deposits can be better than savings accounts when it comes to earning interest, but they have their own set of disadvantages and advantages — many of which come down to your financial goals and comfort zone.

If you’re wondering if term deposits are worth it, here are a few pros and cons to help understand whether they’re right for you:


- Security blanket. Term deposits are some of the safest savings options out there. Your funds are protected, meaning their value isn’t subject to stock market fluctuations or volatility. You’ll be sure to get back the sum you deposited, plus interest upon completion of the term.

- Predictable earnings. Say goodbye to the guessing game. With term deposits, you know exactly how much interest you’ll earn in advance. And high-interest term deposits will make you more than those with lower interest rates attached.

- For-sure savings. If you tend to splurge whenever there’s cash in your wallet, term deposits can help you save and earn at the same time with less temptation to dip into your savings.


- Locked-up funds. Once you commit, you can’t easily touch your funds until the term ends. So if you suddenly need cash, you might have to negotiate some hurdles.

- Opportunity cost. While your money grows safely in a term deposit, you might miss out on potential higher returns from other investments like individual stocks or index funds.

- Interest rates. Depending on the economy, interest rates can be a bit unpredictable. You might secure a great rate today, but tomorrow’s rate might be a different story. On the other hand, you could sign up for a term deposit with a low rate today, only to see better interest rates become available over the next few weeks or months.

Interest rates and term deposits: A deeper look

With term deposits, you accept one fixed interest rate — and you can trust that the interest rate will not change. That means you can calculate in advance exactly how much you’ll earn.

The duration will likely affect the interest rate you’ll receive. For example, longer terms often result in higher interest rates; short-term deposits, on the other hand, tend to pay lower rates.

Your selection of term deposits and interest rates depends on your unique financial goals. Are you comfortable setting aside the money for a long period of time? Or do you need flexibility with withdrawals? Factor in all the conditions before signing off the agreement.

Closing a term deposit

Whether you're looking for a new investment opportunity or simply want to access your funds, understanding the protocol for closing a term deposit ensures a hassle-free experience. Here are a few things to consider:

1. Maturity. When your term deposit reaches its maturity date, all the interest has accumulated. Your financial institution will typically notify you before the term matures.

2. Payment. Once your term deposit matures, you’ll receive both your original investment and the accumulated interest.

3. Extension. Conversely, you might want to extend the arrangement. If you’re content with your current term deposit, some institutions will offer the option to renew it. It’s like ordering another round — you get to enjoy the product all over again. But if you don’t want to renew your term deposit, you can withdraw the funds and use them for new investments, look for a different savings vehicle, or use them toward that big purchase you’ve been waiting to make.

4. Early withdrawal. Breaking a term deposit early has some consequences. But we all know life is unpredictable, and sometimes you might need your funds back at a different, earlier date than you anticipated. So if you do withdraw your funds before the term ends, you might incur a penalty. Check with the bank or financial institution to be sure you understand all the details beforehand.

In a similar vein, if you have any questions about your term deposit at any stage of the process, simply contact the bank or financial institution and ask.

Using term deposits with EarnIn

If you’re ready to improve your personal finances and take greater control of your financial future, EarnIn is ready for you. Our Cash Out tool lets you access your pay as you work, helping you handle unexpected and day-to-day expenses — while avoiding common pitfalls like costly payday loans or high-interest credit card cash advances. So use term deposits to save with the peace of mind that you have access to your pay as you’re earning it. That means less dipping into your savings — or breaking your term deposits — and more options for living your way.

Download the EarnIn app now.

Disclaimer: Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.

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