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Term deposits are deposits which are held at a financial institution with a fixed term. These usually tend to be short term, with maturities ranging from a few months to potentially a few years. When a term deposit is purchased, the customer must understand that the money they wish to withdraw can only happen once the term has ended. However they are able to withdraw the deposit if they provide notice before they intend to withdraw, this notice must be given before the predetermined number of days decided by the institution. These financial product types are sold by banks, thrift institutions and credit unions.
Term deposits can also be known as certificates of deposit (CDs), time deposits and ‘bonds’ in England which are considered as very safe investments and as a result are very appealing to conservative, low-risk investors. Banks that have sold term deposit are very much insured by the Federal Deposit Insurance Corporation and by the National Credit Union Administration for credit unions. As term deposits allow banks to hold onto a deposit for a given amount of time, allowing banks to invest in higher gain financial products. When it comes to the returns of term deposits the financial institutions tend to pay higher interest rates to the lender. Majority of institutions offer fixed rates, but it is not uncommon to have a CD with variable rates. An example of this is that in the early 2000’s when the banks offered CD’s, interest rates were never lowered but were only increased. Interest rates tend to be comparative to factors such as time and principle lent to the institution. The smaller the institution, the higher the interest rate will be, and that the banks which are insured usually offer one of the highest rates.
To close term deposits before the end of the term or maturity can mean a potential loss in interest on the principal. This is simply the consequence of withdrawing prematurely or against the agreement that was stated at the opening of the tem deposits, as said by the Truth in Savings Regulation. If the financials surrounding the deposit are right and the interest rates have raised a significant amount, then the penalty for a financial institution may not be enough of a deterrent for an investor to take out their term deposit and refinance it at a slightly higher rate.
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