Capitalization is also the
practice of adding
unpaid interest charges to the
principal balance of a
loan, thereby increasing the size of the loan.
Interest is then charged on the new
balance, including both the unpaid
principal and the
accrued interest. Capitalizing the interest increases the
monthly payment and the amount of money you will eventually have to
repay. If you can afford to pay the interest as it accrues, you are better off not capitalizing it. Capitalization is sometimes called
compounding.
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