With just three values, we can see what an amount invested today will be worth in the future. When the loan ends, the bank collects $121 from Derek instead of $120 if it were calculated using simple interest instead. This interest is added to the principal, and the sum becomes Derek’s required repayment to the bank for that present time. Interest is the compensation paid by the borrower to the lender for the use of money as a percent or an amount. The concept of interest is the backbone behind most financial instruments in the world. Compound Interest is calculated on the principal amount and also on the interest of previous periods.
- Our calculator allows the accurate calculation of simple or compound interest accumulated over a period of time.
- With compound interest there is a sub-calculation for each time period that includes interest rolling back into the loan or investment balance.
- The disadvantage is that if interest rates drop significantly, as a borrower you’ll still pay the higher, original rate.
- That is to say that interest is only calculated on the principal, not onpreviously accumulated interest.
How to use the simple interest calculator
Here are some other useful variations of the simple interest formula, which allows you to calculate principal, rate of interest and timeframe. Another fascinating thing you can do when going deeper into interest calculations is to compute how long it would take to increase your investment by n%. Are you curious how much time you need to double your initial investment? (Note that you can also treat this $1,000 as the initial value of your loan with simple interest).
Contractor Calculators
Simple interest is a form of interest commonly used for transactions such as auto loans, student loans or personal loans. Our partners cannot pay us to guarantee favorable reviews of their products or services. We believe everyone should be able to make financial decisions with confidence. You can experiment with the CalculatorSoup Amortization Calculator to see how a loan is amortized. You’ll be able to see how with each payment, the amount of interest paid decreases over the course of the loan. You wouldn’t get your $4,166 every month, but you’d have 131 times more in the bank after 100 years.
Simple Interest Formula
You can read more about the difference between simple vs. compound interest below. For a quick example, consider a $10,000 loan at 5% interest repaid over five years. Our calculator will compute any of these variables given the other inputs.
Interest is only paid on the principal value, so the interest paid from simple interest should be slightly less than typical future value calculations. Compounding interest requires more than one period, so let’s go back to the example of Derek borrowing $100 from the bank for two years at a 10% interest rate. This interest is added to the principal, and the sum becomes Derek’s required repayment to the bank one year later. Simple interest is calculated only on the principal amount of an investment. The following examples will show you how to solve different variables involved in simple interest calculation. To find time period between two dates, use date duration calculator.
Simple interest is calculated on the amount of principal, where “principal” means the amount you invest as savings in order to earn interest. The concept of interest rate is also widely applied to various business calculations. Here you have a few examples of our business ralph corporation produces three products at a joint manufacturing cost calculators in which the interest rate plays an important role. To explain what is perpetuity, we have to start with the term annuity. In the most intuitive sense, an annuity is a series of payments that are made during a specified period at equal intervals.
In compound interest accounts the interest you earn is added to the existing balance which then earns additional interest. You inherit $1,000,000 and intend to use it to provide a steady income – you don’t want to spend it, nor invest it. You put it into a bank account with a 5% annual interest rate.
To maximize your savings, choose a savings account that earns a high yield. You can then use our compound interest calculator, which considers compound interest, to see how much your savings balance could grow over time. Think of simple interest as a snapshot of your earnings during a set time period. If you want a rough idea of what you’ll earn, you can use the simple interest calculation.
Thus, we can say that for the borrower, the interest rate is the cost of debt, and for the lender, it is the rate of return. However, some assets use simple interest for simplicity — for example bonds that pay an interest coupon. Investments may also offer a simple interest return as a dividend.