Why are certificates of deposit called time deposits?
Certificates of deposit (CDs) are referred to as "time deposits" because they are a type of savings account that requires a specific length of time for the funds to remain on deposit. The term "time" in this context refers to the duration or the period of time for which the money is locked into the CD without withdrawal.
To understand why CDs are called time deposits, let's break it down further:
1. Purpose: The primary purpose of a CD is to allow individuals to save money with a fixed interest rate for a specific period. By agreeing to leave their money invested for this predetermined time frame, individuals can earn a higher interest rate than they would with a regular savings account.
2. Time commitment: With CDs, you commit to keeping the funds deposited for a specific duration, typically ranging from a few months to several years. This is known as the maturity period. If you decide to withdraw the funds before the maturity date, you may be subject to penalties or lose some of the interest earned.
3. Restrictions on withdrawals: Unlike regular savings accounts, CDs have limitations on withdrawals. Once you invest in a CD, you cannot access the funds until the maturity period is over. This lack of immediate liquidity is another reason they are called "time deposits."
4. Fixed interest rate: CDs offer a fixed interest rate throughout the term of the deposit. This fixed rate further encourages individuals to keep their money invested for the agreed-upon duration, as they lock in a higher interest rate than what they might receive with other types of accounts.
Overall, the name "time deposit" emphasizes the key characteristics of CDs, including the fixed time commitment, restrictions on withdrawals, and the guaranteed interest rate during the specified period.