When you withdraw money at your credit union or bank or via an ATM using your debit card, the money comes from a Demand Deposit Account. Demand deposit accounts allow fund withdrawals at any time without prior notice. Here's everything you need to know about a demand deposit account.
What Is a Demand Deposit?
A demand deposit occurs when an individual deposits money into a bank account. Those funds are then accessible without the depositor giving advance notice to the bank. People use the funds to settle everyday expenses, make purchases, or cater to financial emergencies.
However, the maximum amount a depositor can withdraw depends on the bank's daily limit or the limit set for that particular demand deposit account. In addition, banks or financial institutions usually pay low or zero interest rates on funds deposited in a demand deposit account.
Many checking and savings accounts fall under the category of demand deposits accounts. However, it's also important to note that demand deposits are the complete opposite of term deposits. Term deposits usually require depositors to wait for a predetermined period before accessing their funds. In contrast, funds in demand deposit accounts are accessible at any time.
How Demand Deposits Work
Demand deposit accounts are also known as transaction accounts. The interest rates, fees, and minimum balance requirements for a demand deposit account vary from one financial institution to another.
Here's how demand deposit accounts work:
Deposits
You can deposit money in a demand deposit account and retrieve it anytime you wish without notifying the bank or credit union in advance. Different ways of depositing funds into a demand deposit account include:
- Making a cash deposit at the bank.
- Using a check to deposit funds directly to the account.
- Using a mobile deposit application.
- Adding a direct deposit such as a paycheck to the account.
Withdrawals
Most direct deposit accounts have no limit to the number of times depositors can withdraw money. However, some DDA accounts, such as savings accounts, have limitations on specific transactions. As a result, if a depositor exceeds the set limit, they risk account closure.
The most common ways to withdraw money from a direct deposit account include:
- Writing a check.
- Using online bill pay.
- Paying with a debit card.
- Withdrawing from the ATM.
Features
The features of a direct deposit account differ from one financial institution to another. For instance, some allow depositors to earn interest on the funds deposited in their accounts. In contrast, others don't have such an option. Some banks even require depositors to pay specific fees to open a direct deposit account, while others don't.
Types of Demand Deposits
There are three types of demand deposits, namely:
Checking Account
A checking account is the most popular demand deposit account because it allows depositors to withdraw cash at any time. Checking accounts usually earn zero or minimal interest because of the minimal risk involved.
However, the interest rate for such accounts varies from one financial provider to another.
When signing up for a checking account, the financial institution provides you with a debit card to withdraw money from the ATM. They may also provide you with checks to make payments or purchase items.
Savings Account
The main difference between a savings and checking account is that checking accounts are primarily used in daily transactions and payments, while savings accounts are typically for saving money. For this reason, if you have any money you don't plan to spend immediately or any time soon, it's best to keep it in a savings account.
Savings accounts often have a monthly limit on how frequently a depositor can withdraw money. They also have higher interest rates than checking accounts; therefore, it's easier to grow your money faster if you have a savings account.
Money Market Account
A money market account is a demand deposit account that follows market interest rates. Most of its features aren't available in checking and savings accounts.
In addition, a money market account's interest rate often fluctuates depending on the market interest rate. That said, it offers a more competitive rate than a savings account.
Advantages of Demand Deposits
Some common advantages of demand deposits accounts are as follows:
- Demand deposits funds are payable on demand.
- Minimal eligibility requirements.
- Some demand deposits can be interest bearing.
- Some demand deposits accounts don't have a withdrawal limit.
Disadvantages of Demand Deposits
- Some financial providers charge overdraft fees or monthly maintenance fees.
- Savings accounts have a withdrawal limit.
- They offer little or no interest.
Takeaway
Demand deposits offer the utmost convenience for accessing or transferring funds on demand. For this reason, they're ideal for making daily payments and transactions.
The most common types of demand deposits are checking and savings accounts offered by banks and credit unions. Lastly, demand deposits have several advantages, but their main drawback is that they earn little to no interest.