The deposit rate is the interest rate paid by commercial banks or financial institutions on cash deposits of account holders. Deposit accounts include certificates of deposit (CD), savings accounts, and other investment accounts.
For instance, a deposit interest rate will often be paid for cash deposited into savings and Money Market accounts. Savings accounts earn a rather low rate of interest, but cash deposited in certain other account types are also paid a deposit rate by banks and financial institutions. Deposit interest rates can be either fixed for a certain period of time with a minimum amount of money on deposit, or it can be variable, which fluctuates and is not usually subject to early withdrawal penalties.
Deposit accounts are attractive for investors as a safe vehicle for maintaining their liquid cash, earning a small amount of fixed interest, and taking advantage of insurance. Banks typically offer better rates for accounts holding larger balances. This is used as an incentive to attract high-value clients with considerable assets. By virtue of attaining a higher interest rate, naturally the greater the sum that is deposited, the larger the return over time.
The fixed interest rates guaranteed with certain deposit accounts tend to be smaller compared with the variable returns of other financial vehicles. The trade-off is that the account holder is assured of gradual gains to their deposit versus the potential for sudden profits or losses at even higher scales. In the case of certain self-directed retirement accounts, the various types of investments being made can include real estate, mutual funds, stocks, bonds, and notes.
Banks like to offer competitive interest rates for these deposits in order to attract customers. Depending on the product, premium deposit interest rates may only be available under certain terms such as balance minimums, and possibly maximums. Certain accounts also require a set length of time—six months, one year, or multiple years—that the money must remain deposited and cannot be accessed by the account holder. If the deposit is accessed early, there may be penalties and fees incurred, including the potential loss of the agreed-upon interest rate if the balance remaining in the account falls below the minimum amount.