A term deposit is a fixed income investment, that is, an investment that promises a safe return. You give the bank an amount of money, and within a known period, the bank puts at your disposal your money plus a profit.
The term deposit helps you to invest money for a specific time with a fixed interest rate. The term duration usually ranges from three months to five years. It’s up to you to either withdraw the money you invest with the lender or reinvest it.
Reasons to use a term deposit
There is no risk if you invest your money with lenders and get a specific amount of interest. There is a fixed time in which you can lock away your money. If you want to withdraw your invested amount, you will pay penalty charges. To open a term deposit, you will need to spend at least $5,000. The reasons for the term deposit are as follows.
- Higher interest rates let your money grow fast. By term deposit, you get more interest as compared to transactions and saving accounts.
- The government allows you a guaranteed deposit. It pays a specific amount for Deposit in the unlikely event that the lender fails.
- You don’t need to pay charges for set-up. But you will give 31 days’ notice with a penalty fee for getting back your invested money before the term of Deposit ends.
- You will need to ask to open a linked transaction account while applying for a term deposit.
Characteristics of a term deposit
Next, we will discover the characteristics of term deposits:
- It is a collection instrument that allows the investor to deposit money at a particular time, obtaining at maturity the return of the principal plus the interest at a previously known rate.
- The profitability shows at the beginning of the operation. The client can dispose of the funds upon expiration thereof.
- Individuals or companies can be fixed-term or renewable, nominative, endurable, unipersonal, or personal.
- Renewable: When taking the Deposit under this modality, when the expiration date arrives, the client has three working days to recover part or all the money; otherwise, the Deposit will be renewed automatically for the same term and at the preferential interest rate that the bank has that day.
- Fixed (Non-Renewable): When the expiration date of the Deposit arrives, it stops paying interest (and readjustments, if applicable), and it is up to the person to rescue it from the bank. That is, the money invested earns interest only until the date the Deposit expires.
- Currency: It can be in pesos, UF, or foreign currency (dollars or euros).
- Term: Depending on the Deposit, they are usually from 7 to 365 days.
Benefits of a time deposit
Here are the benefits of term deposits:
- You can make investments for amounts that are within your reach.
- Obtain Preferential Rates for Automatic Renewal Deposits and Deposits made online.
- You can request that your Deposit of more than one year be covered by Tax Benefit 57 bis of the Income Law.
- Generally, the certificates are Electronic Custody, without costs.
- Time deposits in UF practically guarantee a positive absolute return since, when expressed in UF, they are readjusted monthly with the CPI, a factor that partially protects them against inflation.
- Term deposits contracted through the Internet have preferential rates with the convenience of doing it from anywhere at any time.
- The term deposit allows you to earn a fixed amount of interest-based on the specific term. It would be helpful for cautious savers as there is no chance of losing your money.
- The term deposit protects you from market slumps. It means if the market’s interest starts falling, the growth of your investment will continue with the same level of interest.
You should note that profitability is not advisable to renew a term deposit when the expiration date arrives automatically. The new rate applied is usually lower than the original, so it is essential to negotiate again with the financial institution.
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