Compound Interest Calculator

What is Compound Interest?

Whether you put any money away in a bank or borrow money from a financial institution, an interest is applicable. With savings you earn interest and with borrowings, you are liable to pay interest.

Whether it is saving or borrowing, you can also expect one of the two types of interests - simple interest or compound interest. With simple interest, you pay the interest only on the principal amount. However, with compound interest, the interest that you pay in the previous month is added to the principal amount to give you a new balance in your account. The interest for the following month is payable on this new balance.

In simpler terms, compound interest means that you get 'interest on interest'.

What Are the Advantages and Disadvantages of Compound Interest?

Compound interest is extremely beneficial when you are looking at a savings account. It is a great way to earn more with your savings. Unlike simple interest, which only takes into account the initial deposit, compound interest gives you the advantage of a new account balance each month with added interest. This amount may not seem very high initially. However with long term deposits, you can earn quite well on your savings with compound interest.

The flipside of compound interest lies with making any repayments. Now, with any loan such as a Home Loan, Car Loan or Personal Loan, the repayment is broken down into monthly instalments. So, you won't really have to worry about compound interest. However, when it comes to Credit Cards, compound interest can get you on trouble. If you only pay off the minimum amount on balance due, you will be charged a compound interest on the remaining amount. This can make the repayment amount extremely high within a short period of time.

Compound Interest V/S Simple Interest

The basic difference between simple interest and compound interest lies in the amount that the interest is charged on. To help you understand better, here is a detailed difference between simple interest and compound interest:

How to Calculate Compound Interest?

You have the advantage of several online EMI calculators to help you calculate compound interest on savings and borrowings. However it is important for you to know how this value is determined to manage your wealth better.

Now, compound interest may be calculated either monthly or annually.

Calculating compound interest annually

• Add 1 to the rate of interest which is usually a decimal.
• To this value put the power of the tenure of your loan or the number of years you want to have your savings for.
• Multiply the result that you get with the principal amount or the current balance of your account.
• This will give you the new balance that you will have in your account.

Formula: Principal × (1 + rate of interest)^tenure

Calculating compound interest monthly

• Divide the interest rate by 12. This is because interest rates are usually expressed for the whole year.
• Add 1 to the number that you get to denote the compound interest.
• To the value that you get, put the power of the tenure of your loan.
• Multiply the result that you obtain with your principal amount or your current balance to get the new balance.

Formula: Principal × (1 + rate of interest / 12)^tenure

Using a Compound Interest Calculator

To help you calculate your compound interest easily, you have the option of using an online compound interest calculator. In order to calculate your compound interest, all you have to do is enter the rate of interest offered on your savings account or levied on your loan, the tenure of your loan or the time that you wish to put away savings for and the principal amount.

These compound interest calculators also allow you to calculate the principal amount, rate of interest and the tenure of investment or loan in advance. That way, you know how much you need to invest to get a sizeable return or the tenure that you need to invest it for. You are also able to calculate the expected repayment amount so that you can plan your finances accordingly.

Facts About Compound Interest that you Should Know

Understanding compound interest is quite simple. Once you know a few facts about compound interest, you will be able to use it well to your advantage to increase your savings and to also manage your repayments towards your loans and other borrowings better.

• The benefits of compound interest are for everyone: If you are able to invest wisely, you can make the most of compound interests irrespective of your current financial situation.
• There is a flip side to compound interest: With borrowings, especially with credit cards, the concept of compound interest leads to larger repayments.
• It actually adds up faster than you can imagine: Even small savings per month multiply over time due to compounding.
• Time is an important factor with compounding: The longer you compound, the higher the returns. For loans, quicker repayments save money.
• The more often the savings compound, the better it is for you: Frequent compounding (monthly/quarterly) boosts growth for savings but increases repayment for loans.
• Low interest rates should not disappoint you: Even modest rates yield strong results over time due to compounding.
• Compound interest can actually make repayments faster: Incremental repayments help reduce total debt under compounding.
• Compound interest is a safe way to secure your future: Savings accounts with compound interest provide steady, risk-free growth.