A deposit is money held in a bank account or with another financial institution that requires a transfer from one party to another. A deposit can also be the amount of money used as security or collateral for delivery of goods or services.
Key Takeaways
- A deposit generally refers to money held in a bank account.
- A deposit can also be the funds used as security or collateral for the delivery of goods or services.
- A demand deposit account is essentially a checking account in which you can withdraw funds at any time.
- A time deposit account usually requires that you hold your funds in the account for a certain amount of time or face a fee for withdrawal.
How a Deposit Works
A deposit is essentially your money that you transfer to another party, such as when you move funds into a checking account at a bank or credit union.
In the case of depositing money into a bank account, you can withdraw the money at any time, transfer it to another person’s account, or use it to make purchases.
Banks might also offer the creation of separate business accounts. Business banking—also called corporate or commercial banking—is designed to the needs of businesses. They allow for deposits and withdrawals as with personal accounts but often have different limits. Some business accounts will allow employees to deposit or withdraw funds.
Often, you must deposit a certain amount of money, called the "minimum deposit," to open a new bank account. Depositing money into a checking account qualifies as a transaction deposit, which means that the funds are immediately available and liquid, and you can withdraw them without delays.
The other definition of deposit is when a portion of funds is used as a security or collateral for the delivery of a good. Some contracts require a percentage of funds paid before the delivery as an act of good faith. For example, brokerage firms often require traders to make an initial margin deposit to enter into a new futures contract.
When you deposit money into some bank accounts, it can earn interest. This means that, at fixed intervals, a small percentage of the account’s total is added to the amount of money already in the account. Interest can compound at different rates and frequencies, depending on the terms of the bank.
Types of Deposits
There are two main types of deposits: demand and time.
- Demand deposit: A demand deposit is a conventional bank and savings account. You can withdraw the money anytime from a demand deposit account without advance notice.
- Time deposits: Time deposits are those with a fixed time and usually pay a fixed interest rate, like a certificate of deposit (CD). These interest-earning accounts offer higher rates than savings accounts. However, time deposit accounts require that money be kept in the account for a set period of time.
Example of a Deposit
Deposits are often required on many large purchases, such as real estate or vehicles, for which sellers require payment plans. Financing companies typically set these deposits at a certain percentage of the full purchase price. A down payment on a home is essentially a deposit.
You may have to pay a deposit in many rental scenarios, whether you are renting an apartment, car, or another product. The deposit is called the security deposit. A security deposit’s function is to cover any costs associated with any potential damage done to the property or asset rented during the rental period. A partial or total refund is applied after the property or the asset is verified at the end of the rental period.
FAQs
Does Every Deposit Made to a Bank Earn Interest?
Not all deposits to a bank account earn interest. Interest is determined by the terms of the account. Many checking accounts do not provide interest, while most savings accounts and certificates of deposit (CDs) do.
Can I Make a Deposit Using a Check From Another Bank?
You can make a deposit with a check from one bank to another. Most banks will take deposits in the form of cash, checks, money orders, or cashier’s checks. If you’re using a check to open an account, there may be a holding period as the new bank ensures the check will clear.
When I Place a Deposit for Goods or Services, Do I Get the Money Back?
This depends on your agreement. In many rental agreements, a security deposit is held to ensure that there is no damage to a property. This may also be the case in renting equipment. The deposit may be returned if the item or space is returned in the same condition. For other items, a deposit may be used a partial payment on the balance due.
The Bottom Line
A deposit in finance is typically when you transfer money to a bank account like a checking account for safekeeping. However, it can have other meanings as well. For example, you may need to place a deposit, or a certain amount of money, with a business to secure goods or services such as for a rental.
