Capitalization of the deposit - what does it give to the depositor?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

When looking at the range of deposit products offered by banks, the phrase "deposit capitalization" is often encountered. What it is, and what advantages it promises to the depositor, everyone who is going to conclude a deposit agreement with the bank should know.

The procedure for calculating interest income can be based on a simple or complex formula. Simple interest is calculated by multiplying the deposit amount by the yield rate. By dividing the resulting number by 100, you can determine the income that is generated from a simple deposit.

Compound interest is calculated differently. Interest accrued for a specific period is added to the main deposit, and further accumulation occurs on the basis of the increased deposit amount. So, brick by brick, the money invested “grows up”. This process of accruing interest on the “amount plus interest” is the capitalization of the deposit. What this can bring to the investor is quite obvious. The increase in money compared to a simple deposit can be very significant, depending on the method and frequency of capitalization.

If the accumulation of interest will occur at a time, at the end of the term of the deposit agreement, it will be less profitable for the depositor than the monthly interest income. Using the online calculator of deposits with capitalization, which is built into the service of almost any bank, you can see a pattern: the shorter the interest calculation period, the higher the final result. The best option is capitalization of interest once a month.

Analyzing the conditions and parameters of different deposits, we can find the following pattern: deposits with conditional capitalization have a lower rate of return. Credit institutions often go for such a little trick - they willingly explain how profitable the capitalization of the deposit is. That this is due to a decrease in the interest rate by 0.5-1 percentage points, they are silent.

Another aspect may be important for the contributor. The most advantageous combination of deposit conditions and parameters is deposits with capitalization and replenishment of the account. This is an absolutely transparent dependence: having the opportunity to increase the amount of investments, the investor thereby increases the interest due to him. So, he can be sure of a high level of income on such a deposit. Not the last role, of course, is played by the term of placing money in the bank at interest.

Thus, having considered the question of how profitable the capitalization of the deposit is, that it will bring obvious profit, one should nevertheless be attentive to the choice of the type of deposit. The best optionfor the depositor there will be an exact calculation of all dividends due, which the bank employee can do when the client personally contacts the credit institution. Then, based on specific numbers, you can make the final choice. Careful study of all the terms of the contract, accuracy and punctuality in calculating interest - a guarantee that the investor will be profitable.