Term deposits and CDs: how they work and how to choose one

A term deposit, called a certificate of deposit (CD) in the US, locks your money with a bank for a set term in exchange for a set rate. As of October 2026, the US national average 12-month CD paid 1.76%, below 3.7% inflation. Many banks pay more, so the rate you pick matters.

Which deposit suits you depends on when you need the money, whether you want income, and what you think rates will do.

How a term deposit works

You deposit a lump sum. The bank pays interest on a schedule, then returns your money at the end of the term, called maturity.

• Term: anything from 1 month to 5 years or more.
• Minimum: set by each bank; some start low, others ask for a larger sum.
• Lock-up: you agree not to withdraw before maturity. If you do, you usually pay a penalty.
• Maturity: many deposits renew automatically for the same term at whatever rate applies then. Check what yours does.

Fixed, variable and step-up rates

See fixed vs variable for the basics.

Some banks also offer deposits with no early-withdrawal penalty. They usually pay a lower rate for that flexibility.

What US banks pay on average (% a year)

The FDIC publishes national averages each month. These figures are as of 19 October 2026:

The FDIC weights these averages by deposits, so large banks paying little pull them down. Note that the 12-month rate is higher than the 5-year one. Longer isn't always better paid; compare each term on the day you buy.

How payout frequency changes your return

A deposit can pay interest monthly, quarterly, yearly or all at maturity. When interest is added to your balance, it earns interest too. This is compound interest.

The more often interest compounds, the higher the effective yearly return, often quoted as the annual percentage yield (APY). For a 4.5% example rate:

The gap is small. What matters more is whether you spend the interest or leave it in.

Worked example: $20,000 for 3 years at 4.5%

These are example inputs, not a quoted rate.

If you live on the income, monthly payout is useful. If you're building a lump sum, letting interest compound earns $123 more here. Compounded monthly instead, the deposit would reach $22,885.

Breaking a deposit early

Penalties are usually a number of months' or days' interest, and longer terms usually cost more. US rules set only a minimum. Under Regulation D, money withdrawn within six days of deposit must carry a penalty of at least seven days' simple interest.

Banks set the rest. For example, Capital One's CD page (October 2026) lists 3 months of interest for terms of 12 months or less, and 6 months for longer terms. Other banks and countries use different rules.

Ask how the penalty is worked out, and whether it can come out of your original deposit, before you sign.

Laddering: spreading maturities

A ladder splits your money across several terms so some of it matures every year.

A ladder gives you regular access without breaking anything. It also spreads rate risk: you never lock everything in at one rate. Its liquidity is lower than savings, but higher than one long deposit.

Deposit insurance

Many countries run a deposit insurance scheme that repays depositors, up to a limit, if a bank fails. Limits, covered products and currencies differ by country, so look up your own scheme.

In the US, the FDIC insures at least $250,000 per depositor, per ownership category, at each insured bank. It covers CDs. It doesn't cover stocks, bonds or mutual funds, even when an insured bank sells them. If your savings exceed your scheme's limit, spreading them across banks keeps more of it covered.

Tax depends on your country

Interest may be taxed as income, taxed at a flat rate the bank withholds, or tax-free up to a limit or inside a special account. Check your tax authority's rules.

Tax changes the real picture. At 4.5% with a 20% tax rate (both examples), you keep 3.6% after tax.

Real return vs inflation

A real return is what you gain in buying power. The formula is (1 + rate) ÷ (1 + inflation) − 1. US consumer price inflation was 3.7% in September 2026, per Trading Economics.

If inflation rises, these numbers shrink. A variable rate may follow; a fixed one won't. And if you carry a high-interest debt, paying it off usually beats any deposit rate.

Try it with your numbersDebt PayoffCompare debt repayment strategies and discover when you could become debt-free.

Your plan: choosing a deposit for a goal

1. Name the goal and the date. Money you may need within months doesn't belong in a term deposit. Keep your emergency fund in an account you can reach.
2. Match the term. Pick one that ends on or before the date you need the money.
3. Decide if you need income. Living on the interest? Choose a regular payout. Building a lump sum? Let it compound.
4. Take a view on rates, or split. Fixed wins if rates fall; variable wins if they hold or rise. A ladder or a split avoids betting on one outcome.
5. Compare at least three banks on the same day, using the effective yearly return.
6. Get the penalty rules in writing, including whether they can reduce your deposit.
7. Check the deposit insurance for that bank and your country's limit.
8. Calendar the maturity date and decide in advance whether you want it to renew.

What to watch out for

• A rate above zero can still lose buying power. Always compare with inflation.
• Automatic renewal can roll you into a lower rate without asking.
• Step-up headline rates look high; work out the average over the full term.
• Rates change often. Every figure here is dated; check before you act.

This guide is for education only. It is not advice to buy any specific product.