A term deposit account, also called a time deposit, is a banking product that allows you to invest capital for a fixed period in exchange for a contractually guaranteed return. Since the interest rate hikes that began in 2022, term deposits have experienced a resurgence in popularity. Let's examine how they work, as well as their advantages and disadvantages.
How term deposits work
A term deposit is an unregulated investment product whose conditions are freely defined between a saver or treasurer and their bank. There are several types of term deposits:
- Fixed rate: The interest rate is set at opening and remains unchanged throughout the contract duration.
- Variable rate: The rate evolves according to a reference index.
- Progressive rate: The rate increases over time to encourage longer-term savings.
The period for which funds are immobilized typically varies between a minimum of 1 month and several years. In principle, the longer the duration, the higher the return. In exchange, the funds are locked during the agreed period, except in cases of early withdrawal with penalties.
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Advantages and disadvantages of term deposit accounts
Advantages:
- Return known in advance: With a fixed or progressive rate term deposit, the saver knows exactly how much their savings will earn.
- Security: The bank offering the product generally commits to guaranteeing the capital. As long as the institution is financially sound, this offers increased security for the saver.
- Diversification: Possibility to open multiple accounts with different investment timeframes.
Disadvantages:
- Immobilization of funds: Funds are locked until maturity. Early withdrawals require calendar notice and often incur penalties. If withdrawal is requested within the first month, no interest is paid.
- Low flexibility: An amount is invested when opening the contract, with no possibility of adding new deposits later.
- Often high implicit margins: Banks often apply high margins compared to money market rates, making term deposit investments less attractive and less profitable than investing in a money market fund.
Taxation of term deposits for individuals
In France, interest earned is taxed at the single flat-rate tax of 30%, comprising:
- 12.8% income tax (option for progressive tax brackets possible, but irrevocable and applies to all investment income)
- 17.2% social security contributions.
Tax is usually withheld at source by the bank, which then pays the after-tax capital to the saver. This taxation must be taken into account when calculating the real return on the investment.
How to open a term deposit account?
Opening a term deposit is done through a banking (or credit) institution. Conditions often vary significantly from one institution to another. Before subscribing, it's recommended to compare offers and consult a financial advisor.
The term deposit contract must specify:
- The investment duration
- The minimum and maximum deposit amount
- The applicable interest rate (fixed or variable)
- Payment and renewal terms
- Early withdrawal conditions and associated penalties.
Conclusion
Term deposits constitute a secure investment, attractive for those seeking a guaranteed return without risk of capital loss. However, its contractual complexity and lack of flexibility should be taken into account before subscribing.
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