QUESTION: How to understand the "effective rate" on a deposit?

The effective rate on a deposit represents the real yield indicator of the deposit, taking into account all the terms of the contract, including the frequency of accrual and capitalization of interest. The nominal rate, which banks often indicate on promotional banners, does not always reflect the real picture because it does not take into account how often interest is added to the main body of the deposit.

The essence of capitalization is that the interest accrued for a certain period is summed up with the initial deposit amount, and in the next period, interest is accrued on the already increased amount. Financial experts call this process compound interest. That is why two credit institutions with the exact same nominal rate can offer different final yields if one pays interest monthly with capitalization, and the other only at the end of the term.

To correctly evaluate and compare offers from different banks, always request the full cost of the loan or the effective rate. For independent calculation, you can use the yield formula taking into account the term of placement of funds and the frequency of interest capitalization to the principal amount. This will allow you to choose truly the most profitable financial instrument to grow your savings.