Fixed deposit is one option for people to save money for the future on a long-term basis. A higher rate compared to a savings deposit, the guarantee of getting returns on investments, and the possibility of an individual having several fixed deposit investments make this a worthwhile option for many people. In this article, we’ll be discussing what fixed deposit entails, including how to calculate interest rates in fixed deposits. Read on.
How to calculate fixed deposit interest rates in Nigeria would be discussed below:
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What is Fixed Deposit Investment?
A fixed deposit investment involves saving cash in a bank at an agreed interest rate and tenure. The interest rate offered by banks in Nigeria for fixed deposit investments varies according to the bank and the amount invested. Fixed deposit interest rates offered by banks in Nigeria range from 7% to 12% in Nigeria.
Unlike savings deposits which allow customers to withdraw funds whenever they want to, fixed deposits cannot be withdrawn early until the period associated with the deposit elapses. And the maturity period associated with fixed deposit investments ranges from a month to five years, sometimes even more. However, if an investor seeks to withdraw funds from his fixed deposit account before the due maturity, there is usually an early withdrawal fee or penalty imposed by the bank.
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What are the Benefits of Fixed Deposit Investment in Nigeria?
Fixed deposits have several benefits for people seeking to save cash for the future on a long-term basis. Below are some benefits of fixed deposits:
- The interest rate of fixed deposit investment is higher than savings deposit
- The returns from fixed deposit investments are guaranteed
- Investors can have multiple fixed deposit investments with several banks at the same time
- Fixed deposit investments are not affected by fluctuations in the money market
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How to Invest in Fixed Deposits in Nigeria
Almost, if not all, deposit banks in Nigeria offer fixed deposit investment packages to their customers. However, the interest rate on fixed deposit investments varies from one bank to another and according to the amount invested. It is therefore important to compare the minimum investment option and interest rates offered by each bank before making a decision.
Most banks in Nigeria require an investor to have a minimum opening balance of N100,000 for fixed deposit investments. When the interest rate is accepted by the customer, he is to fill out an applicable fixed-term form provided by the bank. Then, he will need a valid form of identification, a recent utility bill, and two passport photographs to complete the application.
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How to Calculate Fixed Deposit Interest Rates in Nigeria
Before one decides to go ahead with fixed deposit investment with any deposit money bank in Nigeria, it is necessary to know how to calculate fixed deposit interest rates. This will help investors know beforehand what amount they would be entitled to from their fixed deposit investments when the tenor has elapsed.
There are two ways to calculate fixed deposit interest rates. The first method involves the use of a fixed deposit interest calculator and the second is the mathematical method. We will discuss how each of these methods can be used to calculate the interest on fixed deposits.
The first method one can use to calculate the fixed deposit interest rate is the fixed deposit interest calculator. All deposit money banks in Nigeria that offer fixed deposit investment options have fixed deposit interest rate calculators on their respective websites. Aside from the fixed deposit interest rates calculator of deposit money banks in Nigeria, a quick Google search of “fixed deposit calculator” will provide several options on the search engine result pages (SERPs).
Using a fixed deposit interest rates calculator is easy. All that is required is supplying the key information required in their respective fields. The details to provide before one can calculate the interest on fixed deposits include the principal amount invested (or to be invested), the tenor, and the rate offered by the bank. Immediately these details are provided in the expected fields, the online fixed deposit calculator would provide the maturity amount to be earned at the expiration of the tenor and the interest earned on the fixed deposit. It is important to note that the interest of fixed deposits in Nigeria is subject to 10% WHT. So, expect the maturity amount to be the sum of the principal amount and the difference between the interest rate and WHT deduction.
The other method for calculating fixed deposit interest rates is by using a mathematical formula. The formula for calculating fixed deposit interest rate is the same as the simple interest formula used to calculate bank interest on loans.
Below is the formula for calculating fixed deposit interest rate:
= P × R% × T/365
where P = Principal
R = Rate
T = tenor (in months)
Illustration of how to calculate fixed deposit interest rates using the mathematical method
Example 1
Assuming Mr. Tajudeen invests N1,000,000 in a fixed deposit with a Nigerian bank for a 30-day tenor and the bank offers 7%, how much will he make after 30 days?
Solution
Interest on fixed deposit = P × R% × T/365
Principal = N1,000,000
Rate = 7% (0.07)
Tenor = 30 days
= 1,000,000 x 0.07 x 30/365 = 5753.425.
The gross interest on the fixed deposit of Mr. Tajudeen is N5753.425.
In Nigeria, interest earned from fixed deposits is subject to withholding tax. So, the gross interest earned from the fixed deposit is subject to 10% WHT.
Mr Tajudeen’s gross interest on fixed deposit of N5753.425 will be subject to 10% WHT.
= 10% (0.1) x 5753.425 = 575.3425
Therefore the Net interest earned by Mr. Tajudeen
= 5,753.425-575.3425 = 5178.082
Having established what Mr. Tajudeen’s net interest is, let’s sum up the principal with the net income to arrive at the total maturity earned at the expiration of the 30-day tenor
Total amount at maturity = N1,000,000 (Principal) + N5,178.082 (Net interest) = 1,005,178