How term deposits and accounts work

Find out how to get guaranteed returns on your savings easily and risk free

Deposits are savings products where the customer deposits a certain amount of cash in a financial institution for a specific period of time, known as the term. Once this term has expired, the entity returns the deposit along with an agreed-upon return (i.e. the interest).

Term deposit contracts include the option to gain access to the money invested in the Deposit before the agreed deadline in exchange for a penalty or fee that will be stipulated in your contract.

Do you know the basics of how deposits work? Are you familiar with the multitude of options for saving money? Find out for yourself in this article where, we not only explain what a term account is, but we'll also tell you where you can invest your savings effectively.

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The bank deposits and interest-bearing accounts offered

There is a vast variety of banking deposits and interest-bearing accounts nowadays, with all sorts of interesting banking products available to customers.

Before you go ahead and open a deposit, however, it's advisable to think a little about your saving intentions. That is to say, how much do you want to save, and how? And, more importantly, for how long?

First of all, bank deposits usually don't entail any kind of risk for the investor, so opening one guarantees that, as long as you don't want to cash it in early, you'll be making a return from the moment you place the deposit. Payback times are, therefore, a key element for determining the return to be made on the invested capital. This means that a deposit in which the investor undertakes not to touch the money for five years could generate higher interest than one with a term reduced by just a few months. In this regard, there are short fixed-term deposits out there, which are variable and can be tailored to suit customer needs.

Of course, we must not overlook the option of interest-bearing accounts when on the subject of term accounts and deposits. What this version of a savings accounts has in common with deposits is that it is risk free, whereas it differs from deposits in that it does not require a minimum withdrawal period to be set. So, in an interest-bearing account, interest is generated from the capital available therein, and the money can be withdrawn by the holder at any time. Logically, the interest is usually lower than in the case of a deposit, although that does not make them less appealing given the flexibility they provide to the investor.

A different realm entirely to that of deposits is, however, that of long-term savings plans, such as pension plans. In this type of plan, the withdrawal conditions are considerably more demanding, since if the sum is withdrawn for reasons other than retirement, extraordinary grounds for release would have to be given, such as a sudden lay-off or incapacity to work. However, in these types of savings plans it is possible to factor in the investment risk.

Term accounts and their reasoning

In deposits or term accounts, the investor can never obtain returns as high as those earned by investing in risky stock on the stock market. The characteristics of this product make it primarily suited to the more cautious, conservative investor who is not after major profits, but rather just want to get a return on their capital. This makes this low risk one of the main features of deposits (though they are not entirely risk free, as penalty fees do apply).

Returns on deposits are in accordance with the Annual Percentage Rate (APR) and the Nominal Interest Rate (NIR), the two measuring devices commonly used to compare and categorize deposits based on their capacity to generate returns. APR considers an annual percentage for the money invested in the event of withdrawal within the agreed term, i.e. upon maturity of the deposit.

Thus, it is easier to understand how deposits work than to figure out the more risky investments, such as buying stocks. Monitoring them is easy and there are hardly any variables, meaning that, once opened, all you have to do is wait for the maturity date to cash in on your return. This is called "interest settlement" and is usually paid out upon maturity of the deposit, although the customer can agree a different settlement period. Interest-bearing accounts offer a one-month, one-quarter, six-month or one-year settlement period.

Mention should also be given to the Deposit Guarantee Fund, a body tasked with protecting investors and ensuring that your money is refunded to you in the event an entity goes bankrupt. Although the compensation limit is capped at €100,000 per person, it is key to highlight its importance and the security it provides.

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How and where can I apply for a deposit?

All banks offer deposits, although, when applying for a specific offer, it is really important to not get carried away by eye-catching interest rates promising super high returns, as these may only apply to the first couple of months. It is, therefore, well worth your while to entrust your savings to a prestigious entity with a serious program.

BBVA, for instance, can offer you its 13-month online deposit. The simple application process can all be done online through any internet-connected device and the rates this product guarantees for its investors place them at the forefront of the market.

So, if you're thinking about investing in a deposit, check out the Deposit calculator on Receiving a customized investment proposal is easy with just a few short steps. To get a proposal, enter the amount you wish to invest, the term you're willing to commit to and, if you like the offer, you can go straight ahead and apply for the deposit. That's how quick and easy it is.

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