The pros and cons of term deposits



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Term deposits are one of many ways for you to invest your money, alongside options such as savings accounts, shares, property and managed funds.

Like any investment option, term deposits come with both advantages and disadvantages.

To help you make sense of whether a term deposit is the right option for you, here are five pros and five cons of putting your money in an Australian term deposit.

What is a term deposit?

A term deposit is a sum of money that you invest with a lender for a fixed amount of time in return for a fixed amount of interest. Loan terms usually range from three months to five years. At the end of the term, you will be given the option to withdraw your money or reinvest it.

The pros of term deposits

They’re simple

Unlike many financial products, term deposits are simple to understand. Also, they’re simple to operate: once you’ve set up a term deposit, you don’t need to worry about it until it’s about to expire.

There are no fees

Term deposits don’t charge upfront or ongoing fees.

Your interest is fixed

Interest rates don’t change during a term deposit period, which means your rate of return can be locked in. Fixing looks even better if market interest rates start falling after your term deposit has started.

Your money is locked away

There’s nothing to stop you blowing money that’s in a savings account; but when your money is locked away in a term deposit, you can’t take it out to make impulse buys. That lack of flexibility makes it easier to save money.

They’re guaranteed by the government

Term deposits carry almost no risk, thanks to the Financial Claims Scheme. If you make a term deposit with a lender and that lender collapses, the federal government will reimburse you for up to $250,000.

That means that if you had, say, $300,000 in a term deposit, you would get $250,000 back but lose $50,000. However, you could protect yourself by splitting the $300,000 between two term deposits. That way, both would be under the $250,000 cap.

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The cons of term deposits

You might regret fixing if rates rise

If you open a savings account and market interest rates rise, your savings account interest rate is also likely to rise. But if you open a term deposit and market rates rise, you’ll be stuck on your original (lower) rate.

Rates might be lower than you think

Term deposits often come with honeymoon rates – but these bonus payments often end after a few months and don’t get reinstated when your term deposit rolls over.

For example, a lender might tempt you to take out a one-year term deposit with an ad that promises 3.00 per cent interest. However, the standard interest rate might be 2.50 per cent; you might get those extra 0.50 percentage points for the first three months only. So for the final nine months of your term deposit, you’d be paid 2.50 per cent rather than the 3.00 per cent rate that caught your eye. And if you allowed your term deposit to roll over, you’d probably continue on that 2.50 per cent standard rate.

Returns may be substandard

You might be able to earn more money by investing in managed funds, property or shares (albeit at greater risk). In some cases, savings accounts might also pay higher interest than term deposits.

Your money is locked away

Need to quickly access your money? Not a problem if it’s in a bank account. But if your money is in a term deposit, you’ll probably have to pay a penalty fee and give your lender 31 days’ notice.

You can’t make extra deposits

While you can keep topping up savings accounts, you can’t do the same with term deposits. If you want to lock away more money, you’ll have to go to the trouble of opening a new term deposit.

Pros
  • They’re simple
  • There are no fees
  • Your interest is fixed
  • Your money is locked away
  • They’re guaranteed by the government
Cons
  • You might regret fixing if rates rise
  • Rates might be lower than you think
  • Returns may be substandard
  • Your money is locked away
  • You can’t make extra deposits
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^Words such as "top", "best", "cheapest" or "lowest" are not a recommendation or rating of products. This page compares a range of products from selected providers and not all products or providers are included in the comparison. There is no such thing as a 'one- size-fits-all' financial product. The best loan, credit card, superannuation account or bank account for you might not be the best choice for someone else. Before selecting any financial product you should read the fine print carefully, including the product disclosure statement, fact sheet or terms and conditions document and obtain professional financial advice on whether a product is right for you and your finances.

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