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8 tips on how to choose term deposits
In recent months, term deposit rates have been on the rise again following the European Central Bank’s interest rate hike. Here are 8 tips when choosing term deposits.
With so many term deposits on offer, it's important to make informed decisions before investing your savings in this type of product. From comparing interest rates to understanding the different return conditions, there are some key tips that can help in this process and give you some peace of mind about your capital.
1. Compare the rates offered
When choosing a fixed-term deposit, the first thing to do is to compare the interest rates offered by the various financial institutions. Also check whether the interest rate is fixed or variable.
This step also helps to identify opportunities to take advantage of periods when rates are more favourable.
2. Consider foreign currency term deposits
When interest rates are low, you may want to consider foreign currency term deposits. In some countries, interest rates may be more attractive than in the local currency. However, before deciding on a foreign currency deposit, it is important to consider the exchange rate risks.
First, assess the economic and political stability of the country issuing the foreign exchange. Countries with sound and stable economies are less likely to experience major currency fluctuations or financial crises that could have a negative impact on the value of the currency.
3. Assess the possibility of withdrawing the deposit
Some term deposits are callable, which means that the principal can be withdrawn before the agreed date, usually with a penalty. On the other hand, some deposits may not be withdrawn, which means that the principal must remain in the deposit until maturity. So think about your liquidity needs and choose the type of deposit that is most suitable to you.
If you anticipate a need to access the invested capital before the end of the term, choose a deposit that allows early withdrawal (taking into account the possibility of penalties). On the other hand, if you have a long-term financial horizon and do not need to access the invested capital before maturity, choose a non-callable deposit, as they generally offer more favourable rates.
4. Check the yield frequency
In addition to the interest rate, it is important to consider the frequency of the return on the deposit. Most fixed-term deposits pay interest at the end of the term, although some pay interest at the beginning or throughout the term. The latter may have a monthly return, while others offer a quarterly or annual return.
Your choice of yield frequency should be based on your financial goals and capital needs, but be aware that deposits with interest paid at the beginning or the end of the term are usually deposits where early withdrawal is not permitted.
If you need regular income to meet expenses or to invest elsewhere, a deposit with more frequent income is the best option. If, on the other hand, you are prepared to wait for income to accumulate over a longer period of time, a deposit offering annual income may be more suitable.
5. Take a look at the difference between "TANB” and "TANL”
The Gross Annual Equivalent Rate (gross AER) – in Portuguese, TANB –, refers to the annual interest rate without deduction of tax. The Net Annual Equivalent Rate (net AER) – in Portuguese, TANL –, on the other hand, takes taxes into account. When comparing term deposits, it is important to consider the net APR, as this rate reflects the actual net return you will receive.
In addition to taxes, there may be other costs associated with fixed-term deposits, such as management fees or commissions charged by the bank. Make sure you take these costs into account.
6. Check the automatic renewal conditions
Some fixed-term deposits are renewed automatically, which means that when the term of the deposit ends, it is automatically renewed for a similar period. Check the rates and conditions of automatic renewal to see if this option is right for you.
It is also important to check whether the fixed-term deposit is subject to new rates and terms and conditions at the time of the renewal. Interest rates may have changed and it is important to make sure that the new rate is still competitive with the current market rate. At the time of renewal, you should review your investment options and check whether there are other, better opportunities in the financial market. This is the best time to check whether the fixed-term deposit is still in line with your objectives and whether there are better alternatives available.
7. Be aware of restrictions and penalties
Before you make a fixed-term deposit, take some time to carefully read the term deposit standardised information sheet to understand any restrictions or penalties associated with early withdrawal and other terms and conditions.
Some deposits may have penalties for early withdrawal, such as the loss of all or part of the interest accrued or a reduction in the interest rate. It is important to be aware of these terms and conditions to ensure that you are comfortable with not having the funds available during the agreed period and to avoid any surprises.
8. Confirm that you are indeed interested in a term deposit
Sometimes there are alternatives to fixed-term deposits that look like fixed-term deposits but are different products, such as structured deposits. Always look for the standardised information sheet for the product you are looking for. If you can’t find it, it’s probably not a fixed-term deposit at all.
If you do find it, make sure that its features indicate that it is a fixed-term deposit and that it is covered by Banco de Portugal’s Deposit Guarantee Fund.
Banco Carregosa, expert advice to protect your capital
These 8 tips on how to choose fixed-term deposits are general guidelines, so it is always advisable to seek professional financial advice in order to make the best decisions according to your specific needs and financial situation.
The Banco Carregosa team is available to help you make informed decisions, providing you will all the information and advice you need on the factors to take into account when investing in fixed-term deposits or any other type of financial product. Contact us, invest with confidence and maximise your returns.