A fixed deposit account is one of the many bank account types available in Nigerian banks. This article explains a Fixed deposit account, the merits and demerits of Fixed deposit accounts, and how best to utilize a fixed deposit account.
A fixed deposit account is an investment account. You get to save your money, and not just that, with the fixed deposit account, you also get an agreed interest rate.
Read on for more detailed information about the fixed deposit account type in Nigeria, how to open a fixed deposit account in Nigeria, and the advantages and disadvantages of a fixed deposit account.
A fixed deposit account is a bank account that allows one to invest a fixed amount of money (fixed deposit) at an agreed interest rate and tenor.
In the olden days, people stashed their money in earthenwares, holes, and even mattresses, all in a bid to secure their money. Today, things are done differently, with banks at the center stage of the evolution.
Among the list of the 3 major bank account types in Nigeria are savings and current accounts.
Each bank account type has its unique features, advantages, and disadvantages. Using the right account type is one of the ways to make your money work for you.
In a fixed deposit account, you agree with the bank to invest a specific amount of money (N100,000, for instance) in your fixed deposit account at given intervals. At the end of a given tenor (6 months, for example), you gain access to your fixed deposit with an additional interest (12% of the amount deposited, for instance).
All banks in Nigeria offer fixed deposit account types. However, the interest rates typically vary from one bank to another.
Now, you might be wondering why you need a fixed deposit account or what you stand to gain from opening one. Below are the advantages of fixed deposit accounts in Nigeria.
Just as it is with opening a savings account, certain documents are needed to process and open a fixed deposit account.
Below are the typical requirements for a fixed deposit account:
The mathematical formula for calculating simple interest is used to calculate the accrued interest for a fixed deposit account, as shown below:
Interest = Principal * InterestRate * Time;
% where
% Principal is the amount invested (the deposit)
% InterestRate is the interest rate
% Time is the duration
Mr. Chike invests N100,000 at a 5% annual interest for one year. What is the interest accrued at the end of the tenor?
Principal = 100000;
InterestRate = 0.05;
Time = 1;
Interest = Principal * InterestRate * Time; % 100000 * 0.05 * 1
% ans = 5000
If Mr. Yusuf invests N100,000 at a 5% interest rate for 60 days, what is the interest after 60 days?
Principal = 100000;
InterestRate = 0.05;
Time = 0.16; % (60 days / 365 days in a year)
Interest = Principal * InterestRate * Time; % 100000 * 0.05 * 0.16
% ans = 800
Nigerian banks charge a 10% withholding tax on interest. Therefore, 10% has to be deducted from the calculated interest earned to get the net interest.
Below is the formula for calculating interest net of withholding tax of a fixed deposit account
NetInterest = GrossInterest - (TaxRate * GrossInterest);
NetInterest = GrossInterest * (1 - TaxRate) % factored
% where GrossInterest = Principal * InterestRate * Time
Mr. Chike invests N100,000 at a 5% annual interest for one year. What is the interest net accrued at the end of the tenor with a withholding tax rate of 10%?
Principal = 100000;
InterestRate = 0.05;
Time = 1;
TaxRate = 0.1;
GrossInterest = Principal * InterestRate * Time; % 100000 * 0.05 * 1
% ans = 5000
NetInterest = GrossInterest(1 - TaxRate); % 5000 (1 - 0.1)
% ans = 4500