About Interest Rate Calculator
Calculate interest earnings on savings, loans, or investments. Supports both simple and compound
interest calculations.
Simple Interest
Simple interest is calculated only on the principal amount. Interest doesn't compound over time.
Formula: I = P × r × t
Example: $10,000 at 5% for 10 years
I = $10,000 × 0.05 × 10 = $5,000
Total = $10,000 + $5,000 = $15,000
Compound Interest
Compound interest is calculated on principal plus accumulated interest. Interest earns interest.
Formula: A = P(1 + r/n)^(nt)
Example: $10,000 at 5% for 10 years (monthly)
A = $10,000(1 + 0.05/12)^(12×10) = $16,470.09
Interest = $16,470.09 - $10,000 = $6,470.09
Formula Variables
- P: Principal amount (initial investment)
- r: Interest rate (as decimal)
- t: Time period (in years)
- n: Number of times interest compounds per year
- I: Interest earned
- A: Total amount (principal + interest)
Compound Frequency Comparison
| Frequency |
Times/Year |
Example ($10k @ 5%, 10yrs) |
| Annually |
1 |
$16,288.95 |
| Semi-Annually |
2 |
$16,386.16 |
| Quarterly |
4 |
$16,436.19 |
| Monthly |
12 |
$16,470.09 |
| Daily |
365 |
$16,486.65 |
Simple vs Compound Interest
| Aspect |
Simple Interest |
Compound Interest |
| Calculation |
On principal only |
On principal + interest |
| Growth |
Linear |
Exponential |
| Use Case |
Short-term loans |
Savings, investments |
| Returns |
Lower |
Higher |
Common Applications
- Savings Accounts: Compound interest monthly/daily
- Fixed Deposits: Compound interest quarterly/annually
- Car Loans: Simple interest typically
- Credit Cards: Compound interest daily
- Mortgages: Compound interest monthly
- Bonds: Simple interest usually
Tips
- Higher compounding frequency = more interest earned
- Time is crucial - start investing early
- Even small rate differences compound significantly over time
- For loans, you want simple interest or low compounding
- For savings, you want high compounding frequency
Power of Compound Interest
Example: $10,000 at 8% for 30 years
Simple Interest: $34,000 total ($24,000 interest)
Compound Interest (Monthly): $110,223 total ($100,223 interest)
Difference: $76,223 more with compound interest!
Rule of 72
Quick way to estimate how long it takes to double your money: Divide 72 by the interest rate.
Examples:
At 6% interest: 72 ÷ 6 = 12 years to double
At 9% interest: 72 ÷ 9 = 8 years to double
At 12% interest: 72 ÷ 12 = 6 years to double
Annual Percentage Yield (APY)
APY accounts for compound interest and shows the actual annual return. Always higher than stated
rate when compounded.
5% APR compounded monthly:
APY = (1 + 0.05/12)^12 - 1 = 5.116%
Frequently Asked Questions
What's better: simple or compound interest?
For savers/investors: Compound interest is better (more earnings). For borrowers: Simple interest is
better (less cost).
How often should interest compound?
More frequent compounding benefits savers. Daily compounding earns slightly more than monthly, which
earns more than annually.
Can I lose money with interest?
Interest itself doesn't cause losses, but inflation can erode purchasing power. If interest rate <
inflation rate, you lose real value.
What's a good interest rate?
Depends on context. Savings: 4-5%+ is good. Mortgages: 6-8% typical. Credit cards: 15-25%
(avoid!). Investments: 8-12% average long-term.
How do banks calculate interest?
Most use compound interest with daily or monthly compounding. They divide the annual rate by
the number of periods and compound accordingly.
Interest Rate Examples
Example 1: Savings Account
Scenario: Save $5,000 at 4% APY for 5 years
Calculation: Compound interest, monthly
A = $5,000(1 + 0.04/12)^(12×5) = $6,104.84
Interest Earned: $1,104.84
Example 2: Car Loan
Scenario: Borrow $20,000 at 6% for 5 years
Calculation: Simple interest
I = $20,000 × 0.06 × 5 = $6,000
Total Repayment: $26,000
Example 3: Investment Growth
Scenario: Invest $1,000/month at 7% for 20 years
Without compounding: $240,000 + $168,000 interest = $408,000
With compounding: Approximately $520,000
Extra from compounding: $112,000
Interest Calculation Methods
Daily Balance Method
Interest calculated on daily account balance. Most common for credit cards.
Average Daily Balance
Sum of daily balances divided by days in period. Used by some credit cards.
Previous Balance Method
Interest charged on balance at start of billing cycle.
Maximizing Interest Earnings
- Start Early: Time is your biggest advantage
- Regular Deposits: Consistent contributions grow faster
- High-Yield Accounts: Seek best rates available
- Let It Compound: Don't withdraw interest earnings
- Increase Rate: Even 1% more makes big difference long-term
- Avoid Fees: Fees can negate interest earnings
Common Interest Rate Terms
| Term |
Definition |
| APR |
Annual Percentage Rate - stated interest rate |
| APY |
Annual Percentage Yield - effective rate with compounding |
| Principal |
Original amount borrowed or invested |
| Maturity |
Date when investment/loan ends |
| Yield |
Return on investment expressed as percentage |
| Fixed Rate |
Interest rate that doesn't change |
| Variable Rate |
Interest rate that can change over time |
Tax Considerations
Interest income is typically taxable. Consider:
- Savings account interest is taxed as ordinary income
- Tax-advantaged accounts (IRA, 401k) defer taxes
- Municipal bonds may be tax-free
- Capital gains tax may apply to investments
- Consult tax professional for your situation
Inflation Impact
Inflation reduces the real value of money over time. Your real return = Interest rate -
Inflation rate.
Example:
Interest earned: 5%
Inflation rate: 3%
Real return: 5% - 3% = 2%
Your money grows 5% but purchasing power only increases 2%.
Investment vs Savings Interest
| Type |
Typical Rate |
Risk |
Liquidity |
| Savings Account |
0.5-2% |
Very Low |
High |
| High-Yield Savings |
4-5% |
Very Low |
High |
| CD (1 year) |
4-5.5% |
Very Low |
Low |
| Bonds |
3-6% |
Low |
Medium |
| Index Funds |
8-12% |
Medium |
High |
| Stocks |
Varies |
High |
High |
When to Choose Simple vs Compound
Choose Simple Interest When:
- Taking out a short-term loan
- Borrowing money (less total interest paid)
- Quick calculations needed
- Educational purposes or basic understanding
Choose Compound Interest When:
- Saving or investing money (more earnings)
- Long-term financial planning
- Comparing actual investment returns
- Calculating retirement savings
Online Savings vs Traditional Banks
Online banks often offer higher interest rates (4-5%+) compared to traditional banks
(0.5-1%) because they have lower overhead costs. Same FDIC insurance protection applies.
Credit Card Interest
Credit cards typically use compound interest calculated daily on the average daily balance.
This makes carrying a balance very expensive.
Example: $5,000 balance at 20% APR
Daily rate: 20% ÷ 365 = 0.0548%
Monthly interest: ~$83.33
Annual interest if not paid: ~$1,000+
Mortgage Interest
Mortgages use compound interest but payments are structured so you pay mostly interest early
and mostly principal later (amortization).
Best Practices
- Always read the fine print on interest rates and fees
- Compare APY, not just APR, for accurate comparison
- Understand compounding frequency before committing
- For debt: pay off highest interest rate first
- For savings: maximize interest with high-yield accounts
- Automate savings to take advantage of compounding
- Review and compare rates annually