November 23, 2017

The Pros and Cons of Using a Term Deposit

A term deposit is one of the many investment products that can help grow your savings. For a lot of people, term deposits can be daunting, and with numerous information resources and factors to consider, finding the right one can be a confusing process.

To determine if a term deposit is suitable for your needs, it is best to do a term deposit comparison.

To determine if a term deposit is suitable for your needs, it is best to do a term deposit comparison. Check interest rates for term deposits from several financial institutions. Another way to compare term deposits is to look at their advantages and disadvantages. In this way, you’ll be able to zero in on the term deposit that fits your requirements.

Here are some of the pros and cons of using a term deposit:

Pros

Some investors consider it low-risk form of investment

If it is under an Authorised Deposit-taking Institution (ADI) and is no more than $250,000, your deposit is guaranteed by the Australian Government.

It’s not affected by market fluctuations

Interest rates for term deposits in Australia are fixed, meaning your deposit will earn with the same interest rate even if interest rates in the market fluctuate. This also enables you to earn more than if you save your money in a transaction account.

It helps to avoid bad spending habits

With a term deposit, you cannot withdraw your money during the term, which can be months or years. This will stop you from accessing your money to buy things that you don’t really need.

Cons

You cannot use your money 

Locking your money away for a certain period of time can also be a disadvantage, especially if you really need it. Bear in mind that if you withdraw your money before the term ends, you will pay a penalty. That is why it is important to understand your financial situation first before using a term deposit so you will know if you’re capable of keeping your hands off your money until it reaches the maturity date.

It will not benefit from the increase in market interest rates

Since a term deposit comes with a fixed interest rate, it will not earn from rises in the market. To avoid this, make sure to get competitive interest rates for term deposits before committing to a particular term.

You cannot make extra deposits

It is not flexible enough to take additional deposits during the term. To address this, use several term deposits with varying terms.

Do you know other benefits and drawbacks of term deposits in Australia? Share your insights in the comments section.

About the author  ⁄ Marxa Dillan

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