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?
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.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Thinking about buying a little bungalow by the bay for the upcoming summer season? You're not alone: It's human nature to want to live by the ocean -- owning a waterfront home conjures...Read More →
Back in the late 1990s, little old ladies became stock-picking experts. The local mailman was just as comfortable recommending Lucent and AOL as he was talking about the weekend forecast. ...Read More →