The simple capitalization of interests occurs when a lender allows the borrower to postpone payments of interest on a loan. The interests that accumulate during that time are added to the loan balance. The capitalization of interests occurs normally with loans, as well as loans for construction or real estate loans. The lender will tell you the borrower before the agreed time for the payment as part of the working process of interest, in some cases, will need to request a postponement of a loan for the interest payments. In construction, this interest is seen as an asset, as the final loan which should include all costs incurred for the construction of the property.
This is due to a loan usually issued for construction before the start of the payment or the construction has been completed, so that the interest can be deferred until the end of the loan. Usually composed of interest capitalization not occur until the borrower begins repayment of the loan, the payment of the same. Interest will accrue on the loan, although it is not yet in a situation of recovery, but the borrower often have the freedom to make a payment of interest only to prevent that occur the same capitalization. Although this process can be seen as a convenient way to avoid payments of a loan for a period of time, it also has disadvantages. In this aspect, the capitalisation of interest increases the final amount due on the loan, thereby increasing the amount that will be paid at the time, this is stipulated in the law on capitalization. This is due to that in the majority of cases the interests is will continue accumulating in the loan once it is in a situation of recovery, even after the capitalization that has occurred. Essentially, this means that the borrower pays interest on interest. Defer the repayment of the loans is a method that many people use to reduce your monthly bills whether student loans or other reasons, so if they are having difficulty to make the respective payments.
Certainly it can be beneficial in the short term, but many lenders recommend making payments of interest only if it is possible, rather than deferring payments entirely. Although the principal amount of the loan will not decrease to avoid capitalisation of accrued interest that occur. In a subsidized loan, the interests that accrue the amortization is subsidized or paid for by the federal Government. In a non-subsidized loan, interest begins to accrue once the loan has been granted, and is immediately capitalised into the loan balance when it begins to pay. For this reason, some people choose to make payments of interest on subsidized loans.