What is a Term Deposit?

A term deposit is a type of low-risk bank deposit with a fixed rate of return. In return for this guaranteed income, you agree to tie up your money until the term of the deposit expires.

Term deposits are a great savings option, so it's best to use them for money you won't need until maturity.

How do term deposits work?

A term deposit locks up your money for a fixed period of time in exchange for a guaranteed return. Understanding the ins and outs of a term deposit can help you decide if it is right for you.

When you open a term deposit, you need to choose the bank, the type of term deposit, the currency and the term, which is the length of time the money will remain in the account.

Deposit amount: this is the minimum and maximum amount you can deposit. 

Deposit term: this is the length of time you leave your money in the bank. The term can vary from a few months to several years. 

Interest rate: This is the annual percentage the bank pays you for your deposit. The interest rate can be fixed or variable. A fixed rate means it does not change during the term of the deposit. A variable rate means that it depends on market conditions and can go up or down.

Type of term deposit: Different types of term deposits affect different aspects of your investment portfolio, such as return, risk, tax, affordability and flexibility. Read more about types of term deposits.

The currency of the term deposit: The currency of the term deposit affects how you will make or lose money due to changes in exchange rates. For example, if you open a term deposit in Euros, you will earn interest in Euros and will not be affected by fluctuations in the exchange rate of the Euro against other currencies.

Interest accrual and payment method: this is how the bank calculates and pays you the interest on your deposit. The accrual method can be monthly, quarterly, annually or at the end of the term. The method of payment can be cash, transfer to your account or capitalization, i.e. adding it to the principal amount of the deposit.

Early withdrawal conditions: This is what happens if you want to withdraw your money before the end of the deposit term. Depending on the bank, you may either lose all the interest you have earned or pay a penalty in the form of a reduced interest rate.

Why should you consider opening a term deposit?

Term deposits are low-risk investments for storing cash and earning a guaranteed return. This makes them a good investment for short to medium-term goals, such as saving for a new car, school fees, a holiday or a deposit for a house.

As there's usually a penalty for withdrawing from a term deposit early, it's also a good place to keep money you don't want to touch for a while.

However, term deposits are not necessarily the best option for everyone in all circumstances. We recommend you read the article: Investing in Stocks, Bonds, and Fixed-Term Deposits: What to Choose for EU Citizens?

Pros and cons of term deposits

Pros of investing in term deposits

Guaranteed Income: fixed-term deposits offer a guaranteed income, paid to the investor according to the terms of the agreement. Investors know in advance what interest they will earn on their deposit, ensuring a stable income throughout the deposit period.

Reliability and Safety: Deposits in EU banks are protected by the Deposit Guarantee Scheme (DGS), which guarantees the reimbursement of funds in case of bank bankruptcy or other extraordinary circumstances. The amount of coverage can be up to €100,000 per depositor in one bank.

The simplicity of Opening and Accessibility: Opening a fixed-term deposit requires no special knowledge or skills. Simply select a fixed-term deposit based on your criteria and complete a straightforward process to open it. Most EU banks offer the option to open a deposit online or through a mobile application.

Ease of Fixed-Term Deposit Selection: Analyzing offerings from over 1,000 banks across EU countries is no easy task, especially with frequent interest rate updates. With the free PickTheBank.eu service, you can select a fixed-term deposit and then proceed to the bank's website for an online deposit opening. Visit the 'Find Deposit' page and see for yourself.

Tax Benefits: In some EU countries, such as Belgium, Italy, Portugal, and others, there are tax benefits for income from fixed-term deposits, which can reduce or exempt individuals from paying income tax. For the most up-to-date information on this matter, it is best to inquire at the bank where you decide to open a term deposit.

Cons of investing in term deposits

Limited Access to Funds: Fixed-term deposits restrict depositors from accessing their funds until the deposit matures or require them to pay a penalty for early withdrawal. This limits the depositor's ability to respond to changes in the market or use their money for other purposes.

Currency Risk: If a deposit is held in a currency other than the euro, such as US dollars or Swiss francs, depositors are exposed to the risk of currency exchange rate fluctuations in relation to the euro. This can lead to a reduction or increase in the deposit's yield when converted to the euro equivalent.

Liquidity: Term deposits lack liquidity, so funds must be tied up for a certain period of time.

Penalties: Term deposits often have high penalties for withdrawing money before maturity.

Taxes: You pay tax on the interest earned on a term deposit during its term. However, tax laws in some EU countries allow you to reduce or eliminate the tax.

Risk: Some term deposits, such as investment deposits, are riskier than other types of deposits.

Lower returns: The returns on term deposits are not as high as some other investments, such as stocks or bonds.

Bottom line

In general, term deposits are safe investments in banks and credit unions that offer a guaranteed rate of return.
Term deposits are safe and are covered by the Deposit Guarantee Scheme up to €100,000 per bank and per depositor.

This is a good option for short to medium term profit taking. 
Term deposits are also a good way to protect your money from inflation.

If you're interested in learning more about fixed-term deposits or other investment opportunities, we invite you to visit our Finding a Fixed Term Deposit page, where you can compare different offers from different banks and choose the one that best suits your needs.

You can also explore our blog where you'll find a wealth of informative articles on fixed-term deposits and financial matters. We're here to help you navigate the world of finance and make the right choices for your financial well-being.