When familiarizing yourself with the range of deposit products offered by banks, the phrase “deposit capitalization” is often found. What it is and what benefits it promises to the depositor, you need to know everyone who is going to conclude a deposit agreement with the bank.
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. Dividing the resulting number by 100, you can determine the income that is generated with a simple deposit.
Compound interest is calculated differently. Interest calculated for a specific period is added to the main deposit, and further accumulation is based on the increased deposit amount. So, brick by brick, the invested money "grows up." This process of calculating 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 deposit calculator with capitalization, which is built into the service of almost any bank, you can see the pattern: the shorter the interest calculation period, the higher the final result. The best option is capitalization of interest once a month.
By analyzing the conditions and parameters of different deposits, one can find the following pattern: deposits with capitalization have a lower rate of return. Credit institutions often go for such a small trick - they willingly explain how profitable the capitalization of the deposit. What is this connected with 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 favorable combination of conditions and parameters of the deposit is deposits with capitalization and replenishment of the account. This is an absolutely transparent dependence: having the opportunity to increase the amount of investment, 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 for placing money in the bank at interest.
Thus, having considered the question of how profitable the capitalization of the deposit is, that this will bring obvious profit, one should nevertheless pay attention to the choice of the type of deposit. The best option for the depositor would be an accurate calculation of all dividends due, which a bank employee can make when a client personally addresses a credit institution. Then, based on specific numbers, you can make the final choice. A careful study of all the conditions of the contract, accuracy and punctuality in calculating interest is a guarantee that the depositor will be profitable.