Capitalization of the deposit: what it is and how it works. When it is profitable to open a deposit with interest capitalization.
Taking into account the competition between financial organizations, various ways of attracting citizens to deposits were invented. There are options that offer the opportunity to partially use the deposit until the expiration of the contract. There are deposits that can be replenished. And there are deposits with capitalization.
The essence and types of capitalization of the deposit
The peculiarity of such a product is that the interest accumulated over the previous calculation period is attached to the body of the deposit. And in the next period, interest will be accrued already for the total amount (deposit + interest).
To date, this formula is considered the most profitable for the depositor. Especially in the case when the accrual is made once a month. Thus, every month the size of the percentage state will increase. It is worth carefully studying the contract, as some banks offer capitalization of the deposit once a quarter or a year.
Depending on the frequency of accruals , the following types of capitalization are distinguished:
- One-time. It is made at the time of renewal of the deposit agreement with the bank.
- Daily. This option provides maximum profitability in the case of a large deposit size. If the deposit amount is insignificant, then the growth dynamics will be minimal. Usually banks do not offer a rate higher than one percent.
- Monthly. The usual option for deposits lasting from six to 12 months.
- Quarterly accrual assumes a larger amount of interest. The main thing is that the duration of the contract should be a multiple of three months.
- Semi-annual. To achieve the liquidity of the deposit, it is required to place it for a very long time.
- Annual. It makes sense only with a significant level of deposit with a placement period of two to five years.
How is the capitalization of interest on the deposit calculated
The calculation of the capitalization of the deposit is traditionally carried out based on the following conditions:
- the amount of the initial deposit;
- annual interest rate level;
- the term of the contract.
Depending on the type of capitalization, the formula includes a number of variables. If interest is accrued daily, the annual interest rate should be divided by 365 days. With monthly accrual – by 12.
Advantages and disadvantages of a deposit with interest capitalization
Like all other programs of interaction with financial structures, capitalization programs have positive and negative sides.
The main positive aspect is the ability to maximize the final profitability of the deposit by constantly increasing its size.
The main negative point is the complete lack of the possibility of using funds during their circulation in the bank. All benefits will be available only after the expiration of the contract. Also, it is worth noting that in case of early termination of the contract on the initiative of the depositor, the lion’s share of interest will be recalculated in favor of the bank.
What is the benefit of capitalization of interest
The benefit from the capitalization of the deposit is suitable mainly for those who have a valid free budget for a long time. The size of the deposit is of decisive importance, since with a minimum deposit threshold, the benefits of capitalization are lost against the background of a minimum interest rate.
Also, the investor is deprived of the opportunity to withdraw interest. The possibility of disposing of them is allowed only after the contract itself is closed.
However, from a mathematical point of view, the capitalization program, with the optimal selection of product conditions, ensures the most progressive growth of the contribution. Each subsequent stage of capitalization means an increase in the indicators of the real level of interest.
The most important thing is to read the contract carefully when signing. The Bank is not interested in the welfare of citizens. You can often find a significant number of pitfalls that offset the benefits of the contribution (for example, commissions).
An alternative to a deposit with capitalization is interest on the balance
Most credit institutions provide services for the accrual of certain financial bonuses for the use of debit cards.
In some cases, issuing a debit card may even be more profitable in terms of interest rates. To do this, a card is issued by the client in order to accumulate a certain capital. To do this, a certain amount is put on the account. A positive aspect is the ability to access these funds at any time. The possibility of depositing and withdrawing funds from the account is not subject to any sanctions from the bank.
At the same time, the bank may, on its own initiative, change the interest accrued on the balance without the consent of the investor. Deposit agreements are protected from this by the terms of the contract. That is, a card with good conditions may turn out to be a publicity stunt. The client takes off the cream only for the first months. Then all the benefits will be removed.
Published: 6 October, 2021