What Is a Deposit Interest Rate?

The deposit interest rate is the rate of interest earned on a deposit account held by a depositor at a bank or savings institution. Common types of deposit accounts include savings accounts, interest-bearing checking accounts, and certificates of deposit. For example, your local bank may offer a deposit interest rate of 0.5% per year on your savings account balance.

How Do Deposit Interest Rates Work?

The bank credits any interest payments earned to the depositor’s account, based on the terms of the specific account.

Deposit accounts are attractive to conservative investors or consumers who are saving for a short-term goal. Deposit interest rates are usually lower than the return that can be earned on riskier investments; they are useful for investors who need to save up some cash and would like to earn a bit of return and be exposed to no risk while they do.

Most deposit accounts are at banks and credit unions, and most banks and credit unions are federally insured by the FDIC or NCUA, lowering the depositor’s risk even further.
Institutions pay different interest rates for different types of accounts. Larger balances held for longer periods typically earn a higher rate while smaller balances that are more easily accessible tend to earn a lower rate.

Most rates paid on deposit accounts are fixed, however, institutions may offer certain deposit products with floating rates that are designed to earn higher interest rates as market rates rise.

How Are Deposit Interest Rates Used by Institutions?

Financial institutions—such as banks or credit unions—use deposit interest rates to attract new deposits.

Traditionally, higher rates are offered to larger deposits. Banks also use deposit interest rates to encourage larger depositors to keep money in the bank for longer terms to provide additional liquidity for the bank. In turn, that liquidity creates the opportunity to increase the bank’s net margin spread (and profits) by growing its loan portfolio.

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Rachel Siegel, CFA
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