Deposits: What You Need to Know


What Is a Deposit?

A deposit is a financial term that has multiple definitions.On the one hand, a deposit is a transaction involving a transfer of funds to another party for safekeeping. On the other, a deposit also refers to a portion of funds used as security or collateral for the delivery of a good.

How Different Types of Deposits Work

A deposit encompasses two different meanings. One kind of deposit involves a transfer of funds to another party for safekeeping. Using this definition, deposit refers to the money an investor transfers into a savings or checking account held at a bank or credit union.

A deposit can be made by individuals or entities such as corporations.

In this usage, the money deposited still belongs to the person or entity that deposited the money, and that person or entity can withdraw the money at any time, transfer it to another person’s account, or use the money to purchase goods.

Often, a person must deposit a certain amount of money in order to open a new bank account, known as a minimum deposit. Depositing money into a typical checking account qualifies as a transaction deposit, which means that the funds are immediately available and liquid, without any delays.

The other definition of deposit refers to when a portion of funds is used as a security or collateral for the delivery of a good. Some contracts require a percentage of funds paid before the delivery as an act of good faith. For example, brokerage firms often require traders to make an initial margin deposit in order to enter into a new futures contract.

Example of a Deposit as Collateral

Deposits are also required on many large purchases, such as real estate or vehicles, for which sellers require payment plans. Financing companies typically set these deposits at a certain percentage of the full purchase price, and individuals commonly know these kinds of deposits as down payments.

In the case of rentals, the deposit is called the security deposit. A security deposit covers the costs of any potential damages done to the property during the rental period and is sometimes refundable.

Special Considerations

When an individual deposits money into a banking account, it earns interest. This means that, at fixed intervals, a small percentage of the account's total is added to the amount of money already in the account. Interest can compound at different rates and frequencies depending on the bank or institution. Time deposits, CDs, and other accounts that restrict withdrawals offer a higher interest rate, which allows you to save more money more quickly.

Key Takeaways

  • A deposit is a financial term with multiple definitions.
  • One definition of deposit refers to when a portion of funds is used as security or collateral for the delivery of goods or services.
  • Another kind of deposit involves a transfer of funds to another party, such as a bank, for safekeeping.

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