Reviewed by Sep 30, 2020| Updated on
The deposit interest rate is paid by a bank or financial institutions to account holders who have deposited with them. Deposit accounts include fixed deposit (FD), recurring deposits (RD), savings accounts, and current accounts.
Generally, financial institutions provide better rates for larger-balance account holdings. It is seen as an opportunity to draw value-added clients with substantial assets. By attaining a higher interest rate and a higher amount invested, the greater is the return over time.
Though this may still be seen as a slower return-generating approach to capital growth, such accounts can offer greater stability compared to other more volatile, high-risk financial products.
The fixed interest rates offered for some savings accounts appear to be lower compared to other financial products with more flexible returns. The tradeoff is that the account holder is assured of steady deposit growth versus the potential for unexpected earnings, or even higher-scale losses. For example, when the account reaches maturity, the deposit with a fixed rate is guaranteed to provide the specified return.
Banks, credit unions, and other financial institutions prefer to deliver favourable interest rates on these deposits to draw consumers more effectively. Depending on the product, interest rates for premium deposits will only be available under certain conditions, such as minimum balances and likely maximums.
Some accounts also require a fixed length of time, such as six months, one year, or multiple years over which the money must remain deposited, and the account holder can not access it. If the deposit is withdrawn early, penalties and fees may be incurred, including the possible loss of the interest rate decided upon if the amount remaining in the account falls below the minimum.
The financial institutions not only promote long-term deposits to support the customer from the increased interest that is received, but also because it gives the institution more liquidity. The banks or institutions can make more lending transactions with its customers, such as loans and credit cards, by having more cash through deposits.