Demand deposits are deposits made into different types of demand deposit accounts (DDA), including checking and saving accounts. These deposits can be withdrawn anytime in the time of need without giving any prior notice. Also, demand deposit accounts can pay interest on the funds deposited over a specific time but aren’t liable to.
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What is a Demand Deposit Account?
Demand deposit accounts (DDA) are the types of accounts with a bank that allows the account holder to withdraw money from the deposited funds at any time. This withdrawal of money can be for any purpose. It does not require holders to submit any withdrawal application to the financial institute. Thus, demand deposit accounts offer money to tackle day-to-day expenses and also pay minimal interest on account of the funds deposited in these accounts.
How Does Demand Deposit Account Work?
Maintaining a demand deposit account is hassle-free for small business owners as it intends to provide ready money. DDA holders don’t need to notify their financial institution before withdrawing from the account. Since the funds from this account are available “on demand”, hence it is called a demand deposit.
The account holders of these accounts can withdraw cash from the nearest ATM or Automated Teller Machine. However, the amount of money to be withdrawn must be present in the account. Though there are no restrictions upon withdrawing funds, the bank or financial institutions may set a daily limit or maximum limit of withdrawal from these accounts.
In this account, any amount of funds deposited by the account holder is called DDA credit. On the other hand, cash that is withdrawn from the account is called a DDA debit.
Types of Demand Deposit Accounts
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Checking Accounts
Checking accounts are types of demand deposit accounts that have higher liquidity. This means anyone can withdraw funds from these accounts at any time during need. However, these accounts offer very low rates of interest or sometimes no interest at all.
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Savings Accounts
Savings accounts are the most common types of demand deposit accounts that holders use for a long duration. Generally, to keep a savings account, one needs to maintain a minimum balance in those accounts. Under the evolved banking system, every adult can open a savings account. In addition, these account savings offer more interest when the holder deposits a larger amount.
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Money Market Accounts
Account holders who follow the market interests, open this type of demand deposit account. The interest rates of these market accounts fluctuate according to the economic situations and activities of the Reserve Bank of India. Hence, the interest rates fluctuate daily and it is difficult to assess whether it is higher than the savings account.
Special Considerations
- DDAs can have more than one owner or joint owners. Though the signature of both is necessary while opening the account, one owner can do the closing. Furthermore, both of the owners can sign a check, deposit cash or withdraw money from the account without the permission of the other.
- Check if there is a minimum balance to maintain or open a demand deposit account. Whenever the account holder fails to maintain that minimum balance in the account, he or she may be subject to a fee charged by the bank for a low balance.
- Upon opening a DDA, holders can withdraw cash on-demand with no eligibility requirements. In addition, these accounts have no lock-up period and endless transfer options. Also, one can withdraw unless that specific amount is present in the account.
Benefits of Opening a Demand Deposit Account
- Liquidity
One of the pivotal benefits of demand deposit accounts is how convenient it is to withdraw cash from these accounts. Account holders can, without any limitation, deposit and withdraw funds from a DDA to meet their daily expenses and payment of bills.
- Zero Penalty or Fees
Generally, withdrawal of money from demand deposit accounts requires no fees or charges, made by the bank or financial institutions. Hence, account holders can take out funds during emergencies or meet day-to-day transactions without any hassles.
- Safety Deposits
Mostly, demand deposit accounts have insurance and follow security standards by the bank or financial institutions. Hence if the financial institutions fail to operate, it will safeguard a certain amount of deposits per individual account holder.
- Myriad of Features
Demand deposit accounts are extremely flexible and easy to access to manage daily expenses. To cater to the diverse needs of account holders, these DDAs come with a myriad of features like mobile banking, net banking, ATMs facilities, a marketplace for trading, etc.
What is a Consumer Demand Deposit Account?
Consumer demand deposit accounts are similar to normal DDAs or other checking accounts. The account holder of these DDAs does not need to provide advance notice to the bank or financial institutions before withdrawing any amount.
Demand Deposits vs Term Deposits
| Basis of Difference | Term Deposit Accounts | Demand Deposit Accounts |
| Level of liquidity | In term deposits, also called time deposits, the account holders have restrictions in withdrawing money for a predefined time frame. | In the case of DDAs, account holders can access the account to withdraw funds at any time. |
| Accessibility | Money deposited in the term deposit accounts can be accessed to meet daily expenses. Hence, it cannot be used during financial emergencies. | Account holders can withdraw cash from the account without any prior intimation to the banks or financial institutions to pay daily bills or expenses. |
| Lock-in Period | As there is a lock-in period in term deposits, there is a maturity date after which the cash can be withdrawn. | There is no such maturity date or lock-in period in the case of demand deposit accounts. |
| Rate of Interest | Type of term deposits like fixed deposits offer higher rates of interest which account holders can enjoy after maturity. | DDAs offer a minimal rate of interest or no interest on the account. |
| Fees or Penalties | If an account holder wants to withdraw money from term deposits before the maturity period, he or she may be liable to pay fees or penalties as per the limitations set by the bank or financial institutions. | There are no fees or penalties to be imposed on the account holder upon withdrawing money from DDAs. |
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FAQs
What are the factors to check with the bank before opening a demand deposit account?
Some of the essential factors to check before opening a DDA are the minimum balance holders must maintain, any applicable overdraft charges, ATM access and mobile banking facilities, security features, etc.
Can demand deposit be a legal mode of debt payment?
The law does not establish demand deposit accounts as a mode of payment for debts, thus one cannot use it as a legal mode of debt payments.
What are the factors that influence interest rates in demand deposit accounts?
Factors like economic fluctuations, inflation, guidelines by the Reserve Bank of India, REPO rates, etc., have a direct influence on the interest rates in demand deposit accounts.
What are the features of money market accounts?
Money market accounts are capable of earning interest on deposits, offer the writing of checks and cover daily purchases.
