What is a Demand Deposit Account and How Does It Work?
Customers often get confused about the terms – demand deposits and demand deposit account (DDA). Demand deposits are basically deposits made into different types of demand deposit accounts from where you can withdraw money without notifying your bank. For instance, your savings account is a demand deposit account. Looks like new information to you?
In this piece, we have simplified what demand deposits are. So, without wasting any time, let’s dive in!
What is a Demand Deposit?
Demand deposits are deposits made in a bank account with the freedom to withdraw the money anytime without any prior notice to the bank. The deposits made in checking and savings accounts are the most common example of demand deposits, where you can withdraw money on-demand without notifying the bank.
Demand deposits eliminate the need to carry cash since you have all your money at your disposal via cheque books, debit cards, or transfers.
However, the interest you earn on demand deposits is almost negligible as compared to the interest you can earn on term deposit accounts like fixed deposit.
Importance of a Demand Deposit Account
The demand deposit account offers the following benefits:
1. Consumer Spending
As mentioned above, demand deposits hold significant importance due to their usability in everyday transactions. You can use the amount withdrawn from the demand deposit account to purchase goods and services. Moreover, demand deposits give you easy access to money and liquidity.
2. Bank Reserves
The total amount held by demand deposits indicates banks’ reserves on hand. Thus, demand deposits are crucial for banks and other financial institutions. Banks hold reserves in the event of unexpected incidents that may require large unanticipated withdrawals.
Furthermore, the more money a bank holds in demand deposits, the more money it must keep in the bank reserves. The money which a bank does not hold in its reserve is referred to as excess reserves. Banks eventually loan out these excess reserves, contributing to the money creation process in the economy.
3. Money Supply
Demand deposits also play an important role in maintaining the money supply within a country. The money supply consists of demand deposits and currency. However, the more money people withdraw from demand deposits, the less money the banks will have left. It creates a decline in the money supply. Furthermore, the banks have less money to loan out.
Also Read: Recurring Deposit (RD) – Features, Benefits and Interest Rate
How Do Demand Deposit Accounts Work?
A demand deposit work in the following manner:
- Open a demand deposit account at your bank.
- Once the account is open, you can deposit money in the deposit account.
- The bank holds your money in the demand deposits account.
- You can withdraw money from demand deposits as and when you require it without notifying the bank or seeking approval.
Furthermore, the bank also charges a monthly fee for maintaining your demand deposits account.
However, you can maintain a minimum balance or set up a direct deposit account to avoid this fee. The policy for charging fees on demand deposits varies from one bank to another.
Types of Demand Deposits Accounts
The following three are the main types of demand deposits account:
1. Checking Account
Out of the three, it’s the most common type of demand deposit account. A checking account delivers maximum convenience since it comes with a debit card and a cheque book.
Thus, you can use these instruments to make payments online, buy in-store items, pay bills online, withdraw cash when required, and more. Their popularity is attributed to their accessibility.
However, you earn the least amount of interest on a checking account, if any at all. Checking accounts are also further classified into different types, including online, reward, student, interest-bearing, and senior checking accounts.
2. Savings Account
A savings account earns you more interest compared to checking accounts. However, a savings account carries more restrictions. Furthermore, you open a savings account for demand deposits for a longer duration and offer less liquidity as compared to checking accounts.
You also have to maintain a minimum balance in a savings account. Eventually, since large amounts of money are held in saving accounts for a long duration, these earn you higher interest.
3. Money Market Account
You can think of the money market account as a hybrid of checking and savings accounts. You can enjoy the benefits of higher liquidity offered by the checking account and earn interest at a higher rate with a savings account.
However, there’s a major drawback of a money market account. The bank might require you to maintain a higher balance for getting started with the money market account.
The interest rate of the money market account will vary depending on the fluctuations in the market interest rates.
Advantages of Demand Deposit Accounts
Listed below are the primary advantages of opening a demand deposits account:
- It offers you the ease and convenience of instant accessibility to withdraw your funds anytime on demand
- It also allows joint owners of a single account
- In most cases, you don’t have to notify the bank before withdrawals or seek approvals for the same
- The banks also permit a considerable amount of transactions. It gives you the freedom to make a sufficient number of transactions whenever required
- Electronic transfers are also allowed, eliminating the need to carry cash
- Banks do not charge extra fees for withdrawing money from the demand deposits account
Disadvantages of Demand Deposit Accounts
Here are the primary drawbacks of a demand deposit:
- Demand deposits carry a very low-interest rate if any at all
- Banks also charge a fixed fee for providing services to their customers
Things to Know About Demand Deposit Account
You should remember the following points in mind concerning the demand deposits account:
- A demand deposit is an amount deposited in a demand deposit account which allows you to withdraw money on-demand.
- You earn a significantly low-interest rate on demand deposits compared to term deposits.
- You don’t have to pay any charges, regardless of the number of withdrawals you make from a demand deposit account.
- You can also make electronic transfers via demand deposit accounts. Thus, it eliminates the need to carry cash.
- Demand deposits have high liquidity.
Also Read: Zero Balance Account – Eligibility, Features and Benefits
Final Word
Term and demand deposits refer to two types of deposit accounts at a bank or a financial institution. Furthermore, time deposits, also known as term deposits or fixed deposits, including investments made for a predetermined period, such as a few months to several years, have many advantages.
However, demand deposit means more liquidity, ease of access, and convenience than term deposits.
FAQs on Demand Deposits
Ans. The primary three demand deposits examples include checking accounts, saving accounts, and money market accounts.
Ans. Demand deposits are called so because they can be accessed anytime, whenever you want, and for any reason. You don’t have to notify the bank prior to withdrawing money from demand deposits. You have access to your money on demand.
Ans. The primary features of demand deposits are that they allow electronic transfers, high liquidity with an eliminated need for carrying cash, and low interest rates.
Ans. You can withdraw cash from a bank account at any time without notifying the bank. Demand deposits are cash left in a bank account. The following characteristic is primarily associated with demand deposits: funds are payable upon demand.
Ans. The three different types of demand deposits included are checking accounts, savings accounts, and money market accounts.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
