What is the capitalization of the deposit and the capitalization of interest on the deposit?

The modern banking system consists of many banks. Banks, in addition to their own funds, also work at the expense of attracted funds, that is, through deposits. The free funds of both individuals and legal entities can be attracted, but the attractiveness of activity and the proposed interest rates directly depend on the bank's need for additional funds. There are many types of deposits, but the most profitable for the client is the investment of funds, under which there is a capitalization of interest on the deposit. Choosing the right type of deposit, you need to clearly understand what the capitalization of the deposit and the capitalization of interest on the deposit. Capitalization of the deposit is an increase in its amount by the amount of accrued interest. Usually, when making a deposit, a separate deposit account is opened, on which the amount entered is taken into account. Depending on the terms of deposit placement, interest can be accrued at the end of the term, monthly, quarterly and even once a year. If the deposit is capitalized, the accrued interest will be added to the deposit amount, which at the end of its term will be transferred to the depositor's current account. The interest on the capitalization of the deposit is calculated each time based on the amount originally deposited, so it does not increase with time. In the case of placement of funds with the possibility of capitalizing interest on the deposit, the accrued interest is not simply added to the deposit amount, but is involved in the next accrual. Thus, for each next accrual, the deposit amount increases by the amount of accrued interest. As a result, interest is accrued on interest, which significantly increases the effective rate on the deposit. Capitalization of interest on the deposit is due to this feature and is advertised by all banks in which there is a similar type of deposit.

The advantage of a deposit with a capitalization of interest is a higher level of income compared to deposits with periodic interest payments. Such a lucrative placement of available funds is chosen by clients who do not wish or can not monthly withdraw interest accrued.

Annual interest rates on deposits with interest capitalization are usually lower than on deposits with interest payments at the end of the term, but higher than on deposits with periodic payments. The reason for this is that the bank is confident that the amount of money entered will be at its disposal exactly the amount of time specified in the contract.

The terms of placement of deposits with interest capitalization vary depending on the bank, but usually range from 1 year. Placing a deposit for a shorter period is not appropriate, since the capitalization of interest will be insignificant and almost invisible. The only exception is contributions to very large sums.

Typically, the capitalization of interest due to the software used by the bank is automatic, so there is no point in checking the accuracy of the accrual. But if you want it can be done, you should only take into account that interest accruals occur from the day following the day of placement of the deposit. If desired, you can even make capitalization on your own. To do this, the deposit is placed with the possibility of replenishment and periodic payment of interest. Accrued and paid amount of interest the client can independently make as a replenishment of the deposit, as a result of which it will receive almost the same interest capitalization.

In addition to the capitalization of the deposit and interest, there is also such a thing as subtle capitalization. To the sphere of deposits it has no relation, referring more to the capital of firms and companies. Thin or insufficient capitalization implies that the company works mainly not at its own expense, but at the expense of borrowed or borrowed funds.