The modern banking system consists of many banks. In addition to their own funds, banks also work at the expense of funds raised, that is, at the expense of deposits. Available funds of both individuals and legal entities can be attracted, but the activity of attraction and the proposed interest rates directly depend on the need of the bank for additional cash. There are many types of deposits, but the most beneficial for the client is investment, in which there is a capitalization of interest on the deposit. When choosing the appropriate type of deposit, you need to clearly understand what is the capitalization of the deposit and the capitalization of interest on the deposit. Capitalization of a 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 deposited is taken into account. Depending on the conditions of deposit placement, interest may be accrued at the end of the term, monthly, quarterly or even once a year. When 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 initially deposited, therefore it does not increase with time. In the case of placing funds with such a possibility as capitalization of interest on a deposit, accrued interest is not only added to the deposit amount, but also takes part in the next accrual. Thus, with each subsequent accrual, the deposit amount increases by the amount of accrued interest. As a result, interest is accrued on interest, which significantly increases the effective deposit rate. Due to this feature, capitalization of interest on a deposit is advertised by all banks in which there is a similar type of deposit.
The advantage of a deposit with capitalization of interest is a higher level of income compared to deposits with periodic interest payments. Such profitable placement of free funds is chosen by customers who do not want or cannot monthly withdraw the accrued interest.
The annual interest rates on deposits with capitalization of interest are usually lower than on deposits with interest paid at the end of the term, but higher than on deposits with periodic payment. The reason for this is the bank’s confidence that the money deposited will be at its disposal exactly the amount of time specified in the contract.
The timing of deposits with capitalization of interest varies depending on the bank, but usually ranges from 1 year. Placing a deposit for a shorter period is impractical, since the capitalization of interest will be insignificant and almost imperceptible. The only exception is deposits for very large amounts.
Usually, capitalization of interest due to the software used by the bank occurs automatically, so it makes no sense to check the correctness of accrual. But if you wish, this can be done, you should only take into account that interest is accrued from the day following the day of deposit placement. If desired, you can even make capitalization on your own. For this, a deposit is placed with the possibility of replenishment and periodic payment of interest. The client can make the accrued and paid amount of interest as a replenishment of the deposit, as a result of which he will receive almost the same capitalization of interest.
In addition to the capitalization of the deposit and interest, there is also such a thing as thin capitalization. It has nothing to do with the sphere of deposits, touching more on the capital of firms and companies. Thin or insufficient capitalization implies that the company operates mainly not at its own expense, but at the expense of borrowed or borrowed funds.