A fixed deposit is a financial product offered by banks and financial institutions that allows customers to deposit a specific amount of money for a fixed period of time in exchange for a fixed interest rate.
According to our associate lawyer, Adalicia Torres, the customer agrees with the bank on the amount and term of the deposit, as well as the interest rate that will be applied during that period.
"During the term of the deposit, the customer cannot withdraw the money without penalty since the objective of the fixed deposit is to keep the money in the account for the agreed-upon period to earn a fixed interest rate," says Torres.
Our specialist in financial and tax matters clarifies that once the term is over, the customer can withdraw the money and the generated interest or renew the deposit.
"A fixed deposit is considered a secure form of investment since the money is secured by the bank, and the return is known in advance," affirms our expert.
Before making a fixed deposit, Torres recommends comparing the interest rates offered by different banks, financial institutions, or cooperatives to find the best offer. Additionally, she advises against putting all the money in a single deposit but rather diversifying investments to minimize risk and maximize returns.
"It's best to choose a term that suits your financial needs and goals. If you need the money in the short term, choose a shorter term; if you want to maximize your earnings, opt for a longer term," advises our lawyer.
Torres also urges verifying the solidity of the bank or financial institution. It's important to ensure that the entity where the fixed deposit is planned to be made is solid, reliable, and has a good track record of financial solvency.
"It's also necessary to consider inflation. If the inflation rate is high, a low-interest rate could result in a long-term loss of purchasing power," warns our Regulatory and Tax Department manager.
Furthermore, it's essential to understand the conditions of the fixed deposit, especially regarding penalties for early withdrawal or cancellation: "Avoid making premature withdrawals as this could result in a loss of interest or even a penalty."
Advantages:
Security: They provide a secure way to invest money as they offer capital guarantee, meaning that the invested money will be fully returned upon the maturity of the agreed term.
Profitability: They offer a higher interest rate than regular savings accounts. Additionally, the interest rate is fixed at the beginning of the term, allowing for an exact calculation of the earnings.
Flexibility: The terms of fixed deposits can vary, adapting to the investment needs and goals of each individual.
Disadvantages:
Limited liquidity: Unlike savings accounts, fixed deposits have a fixed maturity date. If the money is needed before maturity, penalties or fees may apply.
Low flexibility: Some fixed deposits do not allow additional deposits or partial withdrawals.
Inflation risk: If the inflation rate exceeds the interest rate of the fixed deposit, the purchasing power of the invested money may decrease.
If you have further inquiries about this or other topics, you can contact us through our social media channels or by visiting our offices located at Calle Cuscatlán, #4312, Colonia Escalón, San Salvador, El Salvador.
-Written by the Torres Legal Team.