September 20, 2018

Term Deposit Traps to Look Out For

Term deposit is a cash investment at financial institutions such as banks or credit unions. There is an agreed upon interest rate over a certain period that usually ranges from one month to several years. The interest is guaranteed to be fixed for that period.

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Most financial institutions will give notifications for maturity options such as withdrawals or reinvestment. But it is always up to you to give a decision prior to maturity.

Cash rate in Australia is low but still, term deposits have always been popular for investors who prefer security for their capital. Term deposits are safe but in a low-rate environment, the rate that you earn is reduced by some costs. So, before you commit to a term deposit, here are some of the things that you should be aware of:

Early withdrawals

This can bring a great damage to the amount of interest you earn as there are penalty fees involved and the bank can reduce the amount of interest you’ll earn. So, when your money is on a term deposit, just wait for the term to end.

Automatic renewal

This happens when your term deposit expires. Most financial institutions will give notifications for maturity options such as withdrawals or reinvestment. But it is always up to you to give a decision prior to maturity. If you fail to do so, your account will be automatically renewed for the same amount and term. The bad thing about this is that the interest will most likely be set at a lower rate.

Term deposit duration

The length of term deposit has its own risks. The risk in term deposits within short periods like 3-5 months is that the interest rates may go down and it can give you a very hard time to renew for a better rate in the future. In such cases, long-dated term deposits in 3-5 years are a better choice.  However, the risk is that interest rates may rise while your fund is kept at a lower rate.

The 31-day notice period

This is commonly required by banks if you plan on withdrawing early from your term deposit. This is a problem because you can be penalized with interest and some fees.

Sticking with your bank because it’s easy

This is a big mistake because you miss out on a lot of potential interest. If your regular bank is a major one, it generally offers lower rates. It is always wise to shop around first before making a term deposit. Look for another bank that will pay your term deposit interest into your savings account with your regular bank.

Got other ideas on term deposits? Share your insights in the comments section.

About the author  ⁄ Marxa Dillan

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