An add-on term deposit allows you to make additional deposits throughout the term deposit's term, not just at the initial purchase. It offers more flexibility than a standard term deposit but comes with some restrictions.
What Is an Add-On Term Deposit?
An add-on term deposit is a specific type of term deposit account offered by banks and credit unions that allows you to add more money to your account anytime after your initial deposit.
For instance, suppose you buy an add-on term deposit with a 2-year term and an APY of 3 percent. You make an initial deposit of $2,500 and start to deposit an additional amount of $500 every month until the term deposit’s maturity date.
Depending on the term deposit’s compounding frequency, you would have saved $14,500 and might earn $500 in interest at the end of the two years.
Investing in an add-on term deposit allows you to deposit more money in the account and earn more interest than a conventional term deposit.
How Do Add-On Term Deposits Work?
When you open a term deposit account, you typically agree to deposit a set amount of money for a specific period, known as the maturity period, which can range from 30 days to 10 years. In return, the bank or credit union pays you interest on your deposit.
You can't add more money after your initial deposit with traditional term deposits. However, an add-on term deposit allows you to continue making deposits until it reaches maturity.
How you add money to an add-on term deposit depends on the bank or credit union holding the account. For instance, you can schedule automatic transfers from a checking or savings account bi-weekly or monthly.
The bank or credit union may also limit the amount or the number of additional deposits you can make to your term deposit account.
Add-On vs. Traditional Term Deposits
While add-on and traditional term deposits involve depositing money for a specific period, how you fund them makes them different. Conventional term deposits only allow a single deposit during the account opening. In contrast, add-on term deposits let you continue depositing money throughout the term.
Add-on term deposits also differ from traditional term deposits in the following ways:
- Shorter Terms: Add-on term deposits are less common than conventional ones and usually have shorter terms.
- Interest Rate: The interest rate on add-on term deposits is generally lower than that on traditional term deposits.
- Minimum Deposit Requirements: Add-on term deposits typically have lower minimum deposit requirements than traditional ones.
Benefits
Add-on term deposits can be an excellent option for investors who want security and flexibility with their investments. Some benefits offered include:
- Fixed Interest Rate: Add-on term deposits usually come with a fixed interest rate that provides an expected predetermined yield for the term. Variable rate options may also exist for some offerings.
- Low Initial Deposit Requirement: Banks and credit unions require lower initial deposits for add-on term deposits than for traditional ones.
- Offers Flexibility With Deposits: With add-on term deposits, you can continue depositing money as a long-term investment strategy.
Considerations and Limitations
Term deposits are safe short-term investment options that offer guaranteed interest at maturity. While the Federal Deposit Insurance Corporation (FDIC) insures term deposits from banks, the National Credit Union Administration (NCUA) insures term deposits from credit unions. The FDIC and NCUA cover up to $250,000 per depositor per institution.
When deciding between a traditional or add-on term deposit, consider the amount of cash you want to invest and the flexibility you need. Investing in an add-on term deposit is an excellent choice if you:
- Want a stable, high-quality investment that offers guaranteed interest.
- Are comfortable locking up cash for a set period.
An add-on term deposit may be a good option if you start with a relatively small investment and add more deposits as your finances allow.
However, add-on term deposits come with some limitations:
- Lower Interest Rates: Add-on term deposits generally offer lower interest rates than traditional ones.
- Early Withdrawal Penalty: If you withdraw funds before maturity, you may be penalized unless your terms specify otherwise. Penalties can vary widely between financial institutions, and some may allow penalty-free withdrawals during specific periods (e.g., grace periods or no-penalty term deposits).
- Limited Availability: Fewer banks and credit unions offer add-on term deposits than traditional ones.
- Guaranteed Return: Add-on term deposits often start with a fixed interest rate so that you won't benefit from interest rate increases available with variable-rate products.
Takeaway
An add-on term deposit can be an excellent way to store and grow your funds. It benefits those who want a stable, high-quality, short-term investment tool that starts with guaranteed interest and allows cash additions to build up their funds.