Deposit Interest Rate: Definition, Fixed Vs. Variable

What Is a Deposit Interest Rate?

A deposit interest rate is paid by financial institutions to deposit account holders. Deposit accounts include certificates of deposit (CD), savings accounts, and self-directed deposit retirement accounts.

It is similar to a "depo rate," which can refer to interest paid on the interbank market.

Understanding Deposit Interest Rates

Deposit accounts are attractive places to park cash for investors who want a safe vehicle for preserving their capital, earning a small amount of fixed interest, and taking advantage of insurance such as that provided by the Federal Deposit Insurance Corp. (FDIC) and National Credit Union Administration (NCUA).

Most investment portfolios reserve a small allocation of the money invested to deposit accounts, as they provide the benefit of liquidity and capital preservation.

Ways Deposit Interest Rates Are Applied by Institutions

Financial institutions typically offer better rates for accounts holding larger balances. This is used as an incentive to attract high-value clients with considerable assets. When attaining a higher interest rate, naturally the greater the sum deposited, the larger the return over time.

While this may still be seen as a slower growth approach for returns, such accounts can offer more stability than more volatile, high-risk financial products.

For instance, a certificate of deposit with a fixed rate is assured to furnish the stated return when the account reaches maturity. There are also CD accounts that offer variable rates, but these are still typically no-risk products.

In the case of certain self-directed deposit retirement accounts, the various types of investments being made can include real estate, mutual funds, stocks, bonds, and notes.

Banks, credit unions, and other financial institutions tend to offer competitive interest rates for these deposits to better attract customers. Depending on the product, premium deposit interest rates may only be available under certain terms such as minimum balances, and possibly maximums.

Some accounts also require a set length of time—six months, one year, or multiple years—that the money must remain deposited and not accessed by the account holder. If the deposit is accessed and withdrawn early, there may be penalties and fees incurred, including the potential loss of the agreed-upon interest rate if the balance remaining in the account falls below a minimum.

By having more cash on deposit, an institution can make more lending transactions, such as loans and credit cards, available to its customers.

The Bottom Line

A deposit interest rate is paid by financial institutions to deposit account holders. These accounts, like savings, CDs, and self-directed retirement accounts, are attractive for investors as a safe vehicle for maintaining their principal, earning some fixed interest, and for being covered by deposit insurance. However, the fixed interest rates guaranteed with deposit accounts tend to be small compared with the variable and often higher returns of other financial vehicles.