Interest Calculator - Simple vs Compound Interest Calculator (2024)

FAQs

How to know if interest is simple or compound? ›

Simple interest is calculated on the principal, or original, amount of a loan. Compound interest is calculated on the principal amount and the accumulated interest of previous periods, and thus can be regarded as “interest on interest.”

Simple Interest: Calculated annually on the amount you deposit or owe. Compound Interest: Interest earned is added to the principal, forming a new base on which the next round of interest is calculated. This can accrue daily, monthly, or quarterly.

Compound interest is better for you if you're saving money in a bank account or being repaid for a loan. If you're borrowing money, you'll pay less over time with simple interest. Simple interest really is simple to calculate.

It makes a sum of money grow at a faster rate than simple interest because you will earn returns on the money you invest, as well as on returns at the end of every compounding period. This means that you don't have to put away as much money to reach your goals!

For example, let's say you invest $10,000 in a simple-interest account that earns 5%. You'll earn an estimated $500 in interest and your account will be worth $10,500 after a year.

Simple Interest: I = P x R x T

T = No. of Periods.

Interest on an auto loan is calculated using simple interest, not compound interest, meaning the interest doesn't earn interest. Interest on a car loan is often front-loaded so that early payments pay more toward interest and less toward the paydown of the principal loan balance.

Simple interest: 1+r * t, where r is the period interest rate and t is the time period. Compound interest: (1+r)^t, where r is the period interest rate and t is the time period.

When you invest, your account earns compound interest. This means, not only will you earn money on the principal amount in your account, but you will also earn interest on the accrued interest you've already earned.

Your interest is calculated not only on the balance owed but also on the interest that has already accrued. This can result in a snowball effect, where your debt grows more quickly, making it harder to pay off.

What are the disadvantages of simple interest? ›

Disadvantages of Simple Interest

Ignoring the Time Value of Money: Simple interest does not account for the time value of money, which is the concept that a dollar received or paid today is worth more than the same dollar received or paid in the future due to the opportunity cost of using the money elsewhere.

Compound interest makes your money grow faster because interest is calculated on the accumulated interest over time as well as on your original principal. Compounding can create a snowball effect, as the original investments plus the income earned from those investments grow together.

However, savings accounts that pay interest annually typically offer more competitive interest rates because of the effect of compounded interest. In simple terms, rather than being paid out monthly, annual interest can accumulate over the year, potentially leading to higher returns on the sum you've invested.

With simple interest, you would add 5% of $100 - $5 - each year for 10 years, for a total of $50 worth of interest. You would end up owing $150 after 10 years. If you were paying 5% interest compounded annually, though, you would take 5% of the amount each year - including any interest that has already accumulated.

For example, assume you have a car loan for $20,000. Your interest rate is 4%. To find the simple interest, we multiply 20000 × 0.04 × 1 year. So, by using simple interest, $20,000 at 4% for 5 years is ($20,000*0.04) = $800 in interest per year.

The math for compound interest is simple: Principal x interest = new balance. For example, a $10,000 investment that returns 8% every year, is worth $10,800 ($10,000 principal x . 08 interest = $10,800) after the first year. It grows to $11,664 ($10,800 principal x .

Most savings accounts come with compound interest. So even after two months, you will have earned interest on both the amount you put in savings, plus on the interest you were paid in the first month. The higher the interest rate for a savings account, the better.