Capitalization of a deposit is the accrual of interest on the amount that was originally invested, with their further accumulation and subsequent accrual of interest on the entire amount received. Sometimes this procedure is called compound interest.
Let's understand in more detail what capitalization is. This method is used by banking institutions for various deposits, as well as for a number of loan products. As the features of capitalization, one can single out the increased benefit that develops at the same time. Typically, interest on this method is charged monthly or quarterly, but periods may be different. These points should be taken into account when opening an account, that is, when deciding that you want to entrust your financial savings to the bank. In this case, the interest rate, accrual periods and capitalization periods are indicated in the contract. Interest is accrued only for the number of days that the funds were present on the bank account, and the conditions for the payment of intermediate interest on the deposit are necessarily prescribed by adding them to the amount of funds already in the account.
You already learned what capitalization is, now you can say about the timing. Usually they represent time periods in which interest is accrued on invested funds for savings, with additional interest added. Banks set their own capitalization periods, taking into account the adopted policy of conducting transactions with customer accounts.
It is important to note that there are different types of terms and periods of interest capitalization. First of all, we are talking about a one-time capitalization of interest. In this case, interest is accrued at the end of the investment term, in addition, it is possible to prolong the deposit and additional interest charges. If we are talking about the annual capitalization of interest, then we can usually talk about deposits for two or more years. And interest is accrued at the end of each period. Capitalization can even be daily.
You already understand what capitalization of a deposit is, it remains now to choose one or another type, relying on the investment period. It turns out that if the depositor is convinced that he will not need funds for a long time, he can choose for himself a contribution with annual capitalization. In the case where there is no such certainty, it is worth choosing deposits with periods of capitalization much shorter.
If the question of what capitalization is, everything is clear, then let's highlight the basic rules that you should know if you are faced with a bank deposit with a similar feature. When examining the proposals of banks, it is worth paying attention to capitalization, since such deposits turn out to be more profitable at a lower interest rate than those whose interest is initially higher. However, it would be foolish to believe that compound interest is always more profitable. It may turn out that a deposit with capitalization will produce less income - it all depends on the bank’s policy and the products offered. Please note that the final deposit rate may be significantly higher if the capitalized interest is paid at the end of the term, and not at the request of the client. In some offers, the deposit rate may depend on the calculation of interest and the method of payment. Many Russian and foreign banks have long been offering deposits with the possibility of capitalization, so there should not be any problems with choosing the right organization.
Now you know what capitalization is and what advantages it gives.