Interest Calculator – Simple & Compound Interest Calculator
Calculate simple and compound interest on investments
Table of Contents
How to Use
- Enter your principal amount (initial investment or loan)
- Input the annual interest rate as a percentage
- Enter the time period in years
- Choose between simple or compound interest
- Calculate to see your total interest and final amount
Simple vs. Compound Interest
Understanding the difference between simple and compound interest is crucial for financial literacy. Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus all accumulated interest.
| Feature | Simple Interest | Compound Interest |
|---|---|---|
| Calculation base | Principal only | Principal + accumulated interest |
| Growth pattern | Linear | Exponential |
| Formula | I = P × r × t | A = P(1 + r)^t |
| Best for | Short-term loans, simple calculations | Long-term investments, savings |
| Common uses | Car loans, personal loans | Savings accounts, investments, mortgages |
The Power of Compound Interest
Albert Einstein allegedly called compound interest 'the eighth wonder of the world.' Here's why it's so powerful:
| Years | Simple Interest (5%) | Compound Interest (5%) | Difference |
|---|---|---|---|
| 5 | $1,250 | $1,276 | $26 |
| 10 | $1,500 | $1,629 | $129 |
| 20 | $2,000 | $2,653 | $653 |
| 30 | $2,500 | $4,322 | $1,822 |
| 40 | $3,000 | $7,040 | $4,040 |
Starting with $1,000 at 5% interest, compound interest earns over $4,000 more than simple interest after 40 years. The gap widens dramatically over time!
Interest Calculation Formulas
Simple Interest Formula: I = P × r × t, where:
- I = Interest earned
- P = Principal (initial amount)
- r = Annual interest rate (as a decimal)
- t = Time in years
Compound Interest Formula: A = P(1 + r)^t, where:
- A = Final amount (principal + interest)
- P = Principal (initial amount)
- r = Annual interest rate (as a decimal)
- t = Time in years
- Interest earned = A - P
Practical Applications
When to use each type of interest calculation:
- Simple Interest: Short-term loans, bonds, some car loans, and quick calculations
- Compound Interest: Savings accounts, certificates of deposit (CDs), most investments, credit cards, and mortgages
- Investment planning: Use compound interest to project long-term growth
- Debt comparison: Calculate total interest paid on different loan options
- Savings goals: Determine how much to save monthly to reach a target amount
- Retirement planning: Estimate growth of retirement accounts over decades
Frequently Asked Questions
- What's the main difference between simple and compound interest?
- Simple interest is calculated only on the principal amount throughout the investment period. Compound interest is calculated on the principal plus all previously earned interest, causing exponential growth. Over long periods, compound interest significantly outperforms simple interest.
- Which type of interest do banks use for savings accounts?
- Banks typically use compound interest for savings accounts, though the compounding frequency varies (daily, monthly, or annually). The more frequently interest compounds, the more you earn. Credit cards also use compound interest, but against you—that's why credit card debt grows so quickly if unpaid.
- How often does compound interest compound?
- This calculator uses annual compounding for simplicity, but real-world accounts may compound daily, monthly, quarterly, or annually. More frequent compounding results in slightly higher returns. A $1,000 investment at 5% for 10 years grows to $1,629 with annual compounding, but $1,649 with daily compounding.
- Can I use this calculator for loans?
- Yes! For loans, the 'interest' represents the cost you pay to borrow money. Enter your loan amount as the principal and your loan's interest rate. The total interest shows how much you'll pay beyond the original loan amount. Most mortgages and credit cards use compound interest.