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Overview

A discussion of the various types of deposits can be found here

As in loans, there are variations in the frequency with which interest is paid.  There are also variations in the dates on which interest starts or ends.

In the case of loans, the standard measure of the cost of credit is the APR.  Most banks quote the CAR (Compound Annual Rate), sometimes called the AER or EAR (Equivalent Annual Rate) as a standard measure of the benefit of deposits.  This author has been unable to locate any document which specifies in precise terms the CAR calculation or places an obligation on banks to quote it in advertising or in individual agreements with customers.  So our advice is "caveat emptor" (let the buyer beware).

Demand Deposit Interest, Notice Deposit Interest

These accounts normally have variable interest rates.  The rates may be set by the bank from time to time, or they may be related to an external rate (E.G. ECB rate).  Rate changes are normally published in newspapers

Demand deposit rates are normally tiered rates.  Typically, higher rates are paid for larger deposits.  So the bank may pay a very small rate for small deposits, a higher rate for medium deposits, and a higher rate for larger deposits.  As the amount in the account varies, and the balance moves into a different tier, the rate may be automatically changed

Interest on most demand deposits is calculated on a "per diem" basis.  Every time that a transaction arises, interest is calculated from the relevant date of the previous transaction to the relevant date of the current transaction at the tiered rate appropriate to deposits of this size.  The interest is accumulated up to the end of the "interest payment period" and then added to the outstanding balance of the deposit. Interest payment periods on demand deposit accounts are typically annual.  The relevant date is normally the date on which the transaction is cleared, if clearing is required.

Banks need to improve information on demand deposit interest

Frequently, the interest rate is not shown on deposit account statements, and is not shown on online banking for some banks.  Frequently, also, the interest amount is not normally notified to the customer before or after paying, and so the customer discovers the amount of interest when he next looks at the account statement or online system.

Fixed term deposits

Interest rates on fixed term deposits are agreed at the start of a period, which may be 7-days, 30-days, 90-days, 1,2,3,4,or 5 years (or any other agreed period).

For fixed terms under 1 year, the interest is normally paid at the end of the deposit period.  For longer terms, interest may be credited to the account or may be paid to a nominated account in the same bank or elsewhere. 

Interest is calculated for the period at 1/365 of the annual rate for each day of the deposit.  Ideally, by the end of the period, the bank and the customer will have agreed what should happen to the funds at the end of the deposit.  In the absence of such agreement, the bank will normally have a published default option which amounts to paying interest at a lower rate.