Interest Calculator
Calculate interest earned or paid on any amount โ supports both simple and compound interest with flexible compounding options.
Total Interest (Compound)
$2,834
Total Amount
$12,834
Effective Rate
5.116%
Simple Interest vs Compound Interest โ Choosing the Right Formula
Interest calculations are at the heart of every loan, savings account, and investment decision. The two fundamental methods โ simple interest and compound interest โ produce dramatically different outcomes over time. Understanding which applies to your situation determines how you calculate costs and returns accurately.
Simple Interest Formula
A = P + I = P ร (1 + r ร t)
Example: $5,000 at 6% per year for 3 years:
I = $5,000 ร 0.06 ร 3 = $900
Total amount = $5,000 + $900 = $5,900
Compound Interest Formula
A = Amount | P = Principal | r = Annual rate | n = Compounding periods/year | t = Years
Example: $5,000 at 6% compounded monthly for 3 years:
A = $5,000 ร (1 + 0.06/12)^36 = $5,000 ร 1.19668 = $5,983
Interest = $5,983 โ $5,000 = $983 (vs $900 simple โ 9.2% more)
Where Each Method Applies in Real Life
| Financial Product | Interest Method | Notes |
|---|---|---|
| Personal loans (India) | Reducing balance (compound) | EMI structure |
| Fixed deposits | Compound (quarterly) | TDS deducted on interest at source |
| Savings accounts | Compound (quarterly or monthly) | Interest credited to account |
| Microfinance loans | Often flat (simple) | Watch for flat vs reducing rate difference |
| US mortgages | Monthly compound (amortized) | 30-day interest accrual cycle |
| US savings/CDs | Daily compound | APY standardizes comparisons |
| Government bonds (US) | Semi-annual simple | Coupon paid every 6 months |
The Flat Rate vs Reducing Balance Trap
Many lenders in India (especially for vehicle and consumer durables loans) quote a flat rate that looks low but is actually very expensive:
Reducing balance: Interest calculated on outstanding amount each month (standard EMI)
Flat 8% โ Reducing 14.5-15% โ nearly double the effective cost!
โน5L loan, 48 months:
Flat 8%: Total interest = โน5L ร 8% ร 4 = โน1,60,000
Reducing 8%: Total interest = โน85,000 (nearly half)
Inflation-Adjusted Real Returns
Nominal interest rate doesn't account for inflation. To find the real interest rate (purchasing power growth):
If your FD earns 6.8% and inflation is 5.1%, your real return is just 1.7%
References
- Reserve Bank of India โ Master Direction on Interest Rate Policy
- Securities and Exchange Board of India (SEBI) โ Investment return disclosure standards
- Federal Reserve โ Consumer protection and disclosure rules