What Is A Demand Deposit

Demand deposit accounts eliminate your need to carry cash because your money is always at your disposal via a debit card, checkbook, or transfer. But this constant access to funds comes at a cost. Demand deposit accounts generally earn little to no interest compared to time deposit accounts. One common type of demand deposit account is a checking account that allows you to withdraw funds whenever you’d like simply by making a purchase. You can also transfer funds online, visit a bank teller, or take out cash at an ATM. Savings accounts and money market accounts are also types of demand deposit accounts. In exchange for total accessibility, your demand deposit account may earn very little interest, if any at all. However, your funds are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000, which can provide some peace of mind.

Acronym: DDA

How a Demand Deposit Works

Demand deposit accounts work like this: Your bank may also charge monthly fees to maintain your account. But you can usually avoid these fees by maintaining a minimum balance or setting up direct deposits (if it’s a checking account). Each bank has its own fee policy.

Types of Demand Deposits

There are three main types of demand deposit accounts: checking accounts, savings accounts, and money market accounts.

Checking Account

A checking account is one of the most common types of demand deposit accounts. It comes with a debit card and checkbook so you can use your money at any time to pay bills, buy items in-store, make purchases online, pay friends, withdraw cash, and more. Checking accounts are the most accessible type of bank account, but they also pay the least amount of interest. Most checking accounts don’t earn interest at all. Of those that do, the current national average is around 0.03% APY. There are many different types of checking accounts, including online, interest-bearing, reward, student, and senior checking accounts.

Savings Account

Savings accounts are another popular type of demand deposit account. You typically earn more interest in a savings account than you would with a checking account, but there are a few more restrictions to keep in mind. For example, you can’t make more than six transfers or withdrawals a month due to Regulation D. This includes pre-authorized, automatic transfers (like transfers for direct bill payments or overdraft protection) as well as any transfers and withdrawals initiated by telephone, fax, or computer. It also includes transfers when making purchases and those by check or debit card. Withdrawals made in person at a bank branch, by mail, or at an ATM do not count toward the six-per-month limit. If you go over this limit, your bank may charge a fee or convert your savings account into a checking account. Most banks don’t provide ATM cards for savings accounts, which means you’ll have to transfer money to another account if you want to withdraw cash via an ATM.

Money Market Account

Think of a money market account as a checking and savings hybrid account. You get the benefit of having a debit card and checks at your disposal, and you earn higher interest than you would with a typical checking account. The biggest downside of money market accounts is that, like savings accounts, you cannot make more than six withdrawals a month (excluding those made in person, at an ATM, or by mail). A bank may also require you to maintain a higher balance to get started with a money market account.

Demand Deposit vs. Time Deposit

In addition to demand deposit accounts, your bank may also offer time deposit accounts, such as certificates of deposit (CDs). Here’s how the two compare: Rules have changed since then and now it’s legal for demand deposit accounts like checking accounts to earn interest. This makes the main difference between NOW accounts and demand deposit checking accounts the amount of time you must notify the financial institution before a withdrawal. With NOW accounts, a bank may require seven days’ notice. These days, NOW accounts are very rare, likely because they offer no obvious benefits over a demand deposit checking account.

Demand Deposit Fees

Remember, demand accounts are all about accessibility. You get immediate access to your cash right when you need it. But receiving this convenience means that, in addition to accepting lower interest rates, you may also pay fees. Among other situations, direct demand accounts may charge fees if you:

Let your account dip below a certain balanceDon’t have direct deposits set upOverdraft your accountUse ATMs outside of your network

Thanks to the rise of online banks, many institutions offer free checking and savings accounts. They still pay little interest relative to CDs, but they’re a good way to minimize potential costs associated with demand accounts.

Advantages and Disadvantages of Demand Deposits

Pros Explained

Easily accessible: You can withdraw your money at any time by using your debit card, writing a check, visiting a bank teller, making a transfer online, or withdrawing cash at an ATM.Low risk: The money in your demand deposit account is FDIC insured up to the $250,000 legal limit.

Cons Explained

Lower interest rates than CDs: Demand deposits earn lower interest rates than time deposit accounts.Potential fees: Some banks charge monthly fees if your demand account dips below a certain balance or for other reasons.