Explore conservative savings in the form of term deposits

What is a time deposit

A time deposit, sometimes referred to as a term account, is a traditional and relatively conservative form of savings. The customer deposits funds with a bank or credit union for a pre-agreed period of time and the bank commits to pay interest at a fixed rate. The condition is that the client does not dispose of the funds during the agreed period. The reward for limited liquidity is usually a higher interest rate than a current or savings account.

This type of deposit is particularly popular with people who have spare funds that they will not need for a certain period of time and want to be sure of their safe appreciation. From a legal point of view, it is a binding relationship between the client and the bank, where the term deposit agreement plays a key role.

While savings accounts allow the money to be withdrawn at any time, fixed-term deposits are tied to a fixed period of time, and if the client withdraws the funds early, they usually lose the right to interest or even pay a penalty.

How term deposits work

Term deposits can take different forms. Most often, they are arranged for a period ranging from a few months to several years. The client chooses the duration, the amount and the bank. In exchange, they receive a contractually guaranteed interest rate, which is usually higher if the term is longer or the amount is larger.

There are two basic types: deposits with notice and deposits without withdrawal. In the first case, the client can withdraw his funds early but must wait for the expiry of a notice period, for example three months. In the second case, early withdrawal is possible only with a penalty. Clients should therefore consider carefully which option they choose.

The way interest is credited is also an important parameter. Some banks pay interest only at the end of the commitment period, while others allow regular interest payments, which can increase the effective yield by compounding the interest.

In addition to the classic CZK deposits, there are also term accounts in foreign currencies. However, these carry exchange rate risk – although the interest may be higher, fluctuations in the exchange rate may reduce the return.

Legally speaking, this is a contractual arrangement where the term, interest rate, method of interest and conditions for early withdrawal must be precisely defined. Each bank has terms and conditions which become part of the contract.

Is there any control?

Term deposits are a highly regulated financial product. The basic protection is provided by the Banking Act, which stipulates that all deposits with banks and credit unions are insured up to EUR 100 000 (about CZK 2.5 million) per depositor per institution. The insurance is administered by the Financial Market Guarantee System and pays clients their funds in the event of a bank failure.

The Czech National Bank (CNB) supervises banks and credit unions and defines the rules under which they can accept deposits. Term deposits of less than one year are treated as claims in terms of regulation and are governed by special provisions, which is particularly important for funds and institutional investors.

At the same time, the Ministry of Finance issues methodologies for budgetary units on how to classify and report deposits. This is important, for example, for municipalities or schools, which may store temporarily unrestricted funds.

It should be added that the situation is more complex for credit unions. The client also becomes a member of the credit union and has to make a membership deposit, which is not insured. If the credit union goes bankrupt, the client will not get this membership deposit back. Therefore, when choosing an institution, always check not only the interest rate but also the stability of the entity.

What are the benefits and risks of time deposits?

For ordinary clients, term deposits are primarily a way to safely value their money. The main advantage is security, unlike investing in shares or funds, the return is known in advance. The client does not have to follow market developments and knows that if he or she complies with the terms of the contract, he or she will receive the agreed interest.

Another advantage is the state guarantee through deposit insurance. This makes the time deposit one of the safest financial products. For many conservative savers, this makes it the number one choice.

On the other side are the risks. The biggest is limited liquidity – the money is tied up and early withdrawal is penalised. The client may lose all interest or even pay a fee. Another risk is inflation. If the interest rate is lower than the price increase, the real value of the deposited money decreases.

It is therefore advisable to split the deposit between several banks so that the total amount with one institution does not exceed the insurance limit. It is also advisable to combine a term account with a savings account so that the client has a reserve for unexpected expenses. Finally, it is always necessary to read the terms and conditions – some banks automatically renew the deposit at the end of the term, which may not be advantageous for the client.

The contract is the alpha and omega

Every fixed deposit is negotiated on the basis of a contract between the bank and the client. This contract should contain clearly defined details: the amount of the deposit, the duration, the interest rate, the way interest is credited and the conditions for early withdrawal. The bank’s terms and conditions are an integral part of this and may contain provisions that are less favourable to the client.

From a legal point of view, we recommend paying particular attention to penalties. Early withdrawal may mean not only loss of interest but also an obligation to pay a penalty. In some cases, contracts also contain an automatic rollover clause, whereby the deposit is automatically renewed on new terms at the end of the period. This can be disadvantageous for the client, especially if market rates have risen in the meantime.

Particular caution is advisable in credit unions where, in addition to the deposit agreement, the client signs the credit union’s bylaws and makes a membership deposit.

Term deposits are therefore a traditional and safe product that makes sense for conservative clients and institutions with spare funds. It offers stable appreciation, simple management and a high level of security. On the other hand, it is necessary to take into account the limited liquidity and the fact that the real return may be reduced by inflation.

Summary

Fixed deposits are a traditional and very safe way to value your money because they offer a fixed interest rate, often higher than a savings account, in exchange for the client not being able to dispose of the funds for a certain period of time. They operate on the basis of a contract with the bank or credit union which clearly specifies the term of the commitment, the amount of interest, the method of crediting and the conditions for early withdrawal, which is usually associated with penalties. Czech legislation protects deposits – thanks to deposit insurance up to EUR 100 000, clients’ money in banks and credit unions is guaranteed, supervision is carried out by the CNB and methodological guidelines are issued by the Ministry of Finance. The advantage is stability, a known return in advance and a state guarantee, while the risk is low liquidity, the possibility of penalties for early withdrawal and inflation, which can devalue the real return. Moreover, credit unions require a membership deposit, which is not insured. It is therefore advisable to split funds between several banks, combine a term account with a savings account and always read the terms and conditions carefully.