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!
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.
The demand deposit account offers the following benefits:
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 You can use the amount withdrawn from the demand deposit account to purchase goods and services.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.
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.
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.
A demand deposit work in the following manner:
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.
The following three are the main types of demand deposits 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.
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.
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.
Listed below are the primary advantages of opening a demand deposits account:
Here are the primary drawbacks of a demand deposit:
You should remember the following points in mind concerning the demand deposits account:
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.
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.
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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