September 24, 2018

How Does a Term Deposit actually Work?

Aside from your savings account, there are several investment products that you can consider where you can keep your money and let it work for you. One of these is the term deposit.  It is a form of cash investment where you agree on an interest rate for a term or a fixed period. It is being offered by banks, buildings societies, and credit unions.

A term deposit is a great cash investment that offers a stable return of your hard-earned money.

A term deposit is a great cash investment that offers a stable return of your hard-earned money. How? These are some of the things that you can expect when you open a term deposit:

  • Fixed interest rate. There is an interest rate that you will agree on when you open a term deposit. This is fixed, meaning it will apply over the duration of the term, regardless of market fluctuations. This ensures that you’ll have a stable return. However, you will not benefit in case the market interest rate increases, that’s why it is essential to do some fixed term deposit comparison and choose which offers competitive rates.
  • Term. It is up to you on how long your money should be locked away. It can be a short term deposit wherein your money will be invested from one month to less than a year. It can also be a long term deposit wherein your money will be locked away from one year for up to five years. Of course, the longer you allow your money to be on this cash investment, the higher the interest rate will be.
  • Fees. Opening a term deposit does not require any startup or ongoing fees. Bear in mind, though, that you will have to pay a penalty should you decide to withdraw your money sooner. The interest rate will also be reduced.

To avoid penalties, consider your financial goals to see if term deposit is suitable for you. For instance, if you’re planning to buy a house in a few years and you want your money to yield better returns then opening a term deposit may be a great way to grow your money.

Another consideration is the market. It is important to check the interest rates for term deposits of banks, building societies, and credit unions. Remember that you will be stuck to your chosen interest rate over a certain period, so make sure to check the rates first.

Do you have other ideas on term deposit rates in Australia and fixed term deposit comparison? Share your insights in the comments section.

About the author  ⁄ Marxa Dillan

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