Deposit Interest Rate

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Adam Fischbaum

Adam enjoyed a distinguished 20+ year career as a portfolio manager at several prominent NYSE member firms, and he's also worked as a financial advisor at a $1 billion+ boutique investment outfit.

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Rachel Siegel, CFA

Rachel Siegel, CFA is one of the nation's leading experts at ensuring the accuracy of financial and economic text.

 Her prestigious background includes over 10 years of experience in creating professional financial certification exams and another 20 years of college-level teaching.  Rachel has served as Academic Director at Bloomberg, as well as Exam Development Director at the CFA Institute. She holds a BA in English and an MBA, both from Yale University.

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Updated August 9, 2020

What Is a Deposit Interest Rate?

The deposit interest rate is the rate of interest earned on a deposit account held by a depositor at a bank or savings institution. Common types of deposit accounts include savings accounts, interest-bearing checking accounts, and certificates of deposit. For example, your local bank may offer a deposit interest rate of 0.5% per year on your savings account balance.

How Do Deposit Interest Rates Work?

The bank credits any interest payments earned to the depositor’s account, based on the terms of the specific account.

Deposit accounts are attractive to conservative investors or consumers who are saving for a short-term goal. Deposit interest rates are usually lower than the return that can be earned on riskier investments; they are useful for investors who need to save up some cash and would like to earn a bit of return and be exposed to no risk while they do. 

Most deposit accounts are at banks and credit unions, and most banks and credit unions are federally insured by the FDIC or NCUA, lowering the depositor’s risk even further.
Institutions pay different interest rates for different types of accounts. Larger balances held for longer periods typically earn a higher rate while smaller balances that are more easily accessible tend to earn a lower rate. 

Most rates paid on deposit accounts are fixed, however, institutions may offer certain deposit products with floating rates that are designed to earn higher interest rates as market rates rise.

How Are Deposit Interest Rates Used by Institutions?

Financial institutions—such as banks or credit unions—use deposit interest rates to attract new deposits

Traditionally, higher rates are offered to larger deposits. Banks also use deposit interest rates to encourage larger depositors to keep money in the bank for longer terms to provide additional liquidity for the bank. In turn, that liquidity creates the opportunity to increase the bank’s net margin spread (and profits) by growing its loan portfolio.
 

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Rachel Siegel, CFA is one of the nation's leading experts at ensuring the accuracy of financial and economic text.  Her prestigious background includes over 10 years of experience in creating professional financial certification exams and another 20 years of college-level teaching.

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