We must know the difference between simple and compound interest. Additionally, it is beneficial to know how to calculate the interest with a simple and compound interest calculator.
The total payable amount will be different if you calculate compound interest through a compound interest calculator instead of simple interest and vice versa.
While both are basic financial concepts, you should be familiar with them to make informed decisions when making investments or taking loans.
Difference Between Simple And Compound Interest
These interest types are ideal for people who wish to earn the most interest possible. The main factor here is whether you’re accruing compound or simple interest. Let’s know the difference between these and their calculators.
- Simple Interest: Institutions calculate simple interest annually on the deposits they make or owe.
- Compound Interest: The interest they earn is for principal forming a new base where they calculate the next interest round. It accrues monthly, daily, or quarterly interest.
Formulas To Find Simple And Compound Interest
Here is the formula for calculating a simple interest and compound interest:
Simple Interest Formula
Simple Interest = P x i x n
- P = Principal
- i = Rate of interest
- n = Overall loan term
Thus if you charge simple interest at 5% on a $10,000 loan taken for three years, you can calculate the interest amount for the borrower to pay as $10,000 x 0.05 x 3 = $1,500.
It is possible to pay $500 annual interest or $1,500 over a three-year term loan.
Compound Interest Formula
The formula to calculate compound interest in one year is:
- CI = (P (1 + i)^n) – P
- CI = P ((1 + i)^n – 1)
- P = Principal
- i = Interest rate in percentage terms
- n = number of compounding periods in a year
Compound Interest is the total interest and principal in the future (or the future value). The principal amount is known as the present value (PV). PV is the current worth of future money or cash flow stream provided in a particular rate of return.
For simple interest, the amount is compounded when you charge it. Here it would be:
SI = $10,000 ((1 + 0.05)3 – 1)
= $10,000 (1.157625 – 1)
While the total interest over the three years of the loan is $1,576.25, the amount is not the same for three years as the compound interest also considers accumulated the previous year’s interest. You can calculate in a compound interest calculator online.
We show the interest payable at each year’s end.
Number of Years
(P) Opening Balance
5% Interest (I)
(P+I) Closing Balance
Number of Years – 1
P – $10,000.00
I – $500.00
(P+I) – $10,500.00
P – $10,500
I – $525.00
(P+I) – $11,025.00
P – $11,025
I – $551.25
(P+I) – $11,576.25
The total interest is
What Is A Simple Interest Calculator?
A simple interest calculator is a utility tool for calculating interest on loans or savings without any compounding. You can calculate simple interest on the principal amount monthly, daily, or annual basis. The calculator has a formulae box, where you need to enter the annual rate or principal amount of days, months, or years. The calculator also displays interest on the investment or the loan.
Let’s Understand Simple Interest Calculators
These calculators present the accrued amount, including the principal and the interest. The calculator works on the mathematical formula shown below:
A = P (1 + rt)
P = Principal Amount
R = Rate of Interest
t = Number of years
A = Total accrued amount (both principal and interest)
Interest = A – P
Let’s take an example to know the working of a simple interest calculator. The principal is $10,000, the interest charges are 10%, and the total time is six years. Calculation of simple interest is:
A = 10,000 (1+0.1*6) = Rs 16,000.
Interest = A – P = 16000 – 10000 = Rs 6,000
Steps To Use Simple Interest Calculator
The simple interest finder shows the simple interest on deposits. Here is how you can use a simple interest calculator:
- Enter the type of interest as simple interest.
- Enter the principal amount
- Then fill out the annual interest rate section.
- You should select the duration in weeks, quarters, days, or years.
- The simple interest calculator shows the simple interest you earn on your deposit.
Compound Interest Calculator
By compounding, we mean when we earn interest on investment over a certain time, which gets growth in earnings. Compounding power also increases your earnings according to your investments. Here is how you can know the compound interest calculator better. Lenders add interest on the principal amount, known as compound interest. They add the amount to the initial investment and calculate new interest on it with a compound interest calculator. The investment also grows as the process is consistent throughout the investment phase. You can see the compound interest calculator if you’re thinking about the type of interest you want.
Using The Compound Interest Calculator
You must know about the money that you’ve got for upfront investment for a start. Input numbers in the space provided. With the power of compounding calculator, you can also add more money to your investments regularly. Type the amount you would like and select whether you’ll want monthly or yearly payments.
Now consider the years for the period of return. Will you make payments regularly for five years, or do you need extra time? Either you can adjust the slider or just input the years you need in the box. After you’ve invested, you can select the remaining investment for a long time. With the interest compounds, you’ll have more money over time.
As you change the interest rate, either by shifting the slider or inputting the numbers in a box, you’ll notice the total amount you’ll expect to earn at the end of the investment term.
You get a clear indication of the best interest rate based on the abilities of your investment, the time required for investment, and the amount you expect to earn by the end of the investment term.
How Does The Calculator Work?
Enter the opening balance in the compound interest calculator and use sliders for adjusting the interest rate, monthly contribution, and the year.
Let’s assume you’ve got an opening balance of $ 10,000 with a 4% interest rate for 15 years.
Let’s understand the growth of principal and the earned/owned interest with an example of simple vs. compound interest.
The simple and compound interest calculator calculates simple interest as $6,000 and compound interest as $8,203 with an ending balance of $8,203.
So Which One Is Better? Simple Or Compound Interest?
The compound interest calculator will eventually be more than simple when the rates and time are the same. It’s great to get the interest, but it’s not good when you’re paying it back.
How To Know What Type Of Interest I Have?
Contact your lender or check your loan documents if you’re not sure about the type of interest your loans are charging. Or else, you can check the compound interest calculator to know how much they are charging you. Many credit cards use compound interest, while auto and federal-owned student loans use simple interest. You can amortize all mortgage loans by finding outcomes with a simple interest calculator tool.
Before investing or borrowing money, you should compare and find the effects of different interest rates with the help of a simple and compound interest calculator. Interest rates should also play a vital rate in the process of decision-making.
The power of the compounding calculator shows the effects of a simple monthly interest rate and shows future value if you compound interest every month. Select an investment (like a savings account or other financial products) and get the benefit over time. Business Tax Benefits is the place to rely on for any financial investments or queries whether you want to ensure maximum interest return or only want to calculate simple or compounded interest. Our Professional CPAs and tax accountants help your business grow exponentially with the correct analysis and the right knowledge of simple and compound interest concepts. We help you in managing finances and achieving maximum term profits.