What is interest?
Interest is the cost of borrowing money or the reward for investing it. It is calculated as a percentage of the principal amount over a given period.
How is simple interest calculated?
Simple interest is calculated only on the principal amount. Formula: Interest = Principal × Annual rate × Time. For example, $1,000 at 5% annual rate for 3 years will earn $150 in interest. Final amount: 1000 + 150 = $1,150.
How is compound interest calculated?
Compound interest is calculated on the principal and on previously accumulated interest. Formula: Final amount = Principal × (1 + r/n)^(n×t), where r is the annual rate, n is the compounding frequency, and t is time in years. For example, $1,000 at 5% for 3 years (monthly compounding) = $1,161.62.
What is the difference between simple and compound interest?
Simple interest is calculated only on the principal, so earnings grow linearly. Compound interest is calculated on the principal plus accumulated interest, so earnings grow exponentially. The longer the period, the greater the difference between the two methods.
What is compounding frequency?
Compounding frequency indicates how often interest is added to the principal. The more frequently interest is compounded, the greater the final return. This calculator supports yearly, quarterly, monthly and daily compounding.
How long does it take to double your money?
A quick estimate is the Rule of 72: divide 72 by the annual interest rate to get the approximate years to double. At 3%: 72 ÷ 3 = 24 years. At 6%: 72 ÷ 6 = 12 years. At 9%: 72 ÷ 9 = 8 years. The rule works well with compound interest and rates between 2% and 20%. You can verify the exact figure with this calculator by entering your principal, rate, and compounding frequency.
What is the difference between APR and APY?
APR (Annual Percentage Rate) is the yearly cost of borrowing — it represents the nominal interest rate on a loan or credit card without including compounding. APY (Annual Percentage Yield) is the true annual return on savings or investments, accounting for compounding frequency. A savings account with 5% nominal rate and monthly compounding has an APY of 5.12% — higher than the stated rate because interest compounds. Use APR when comparing loan or credit costs; use APY when comparing savings returns. When planning a mortgage alongside your savings, our mortgage calculator shows total interest cost to compare against your savings yield.