Simple Interest Formula with Calculator

To do so, you need to compute the Annual Percentage Yield, which is also known as the Effective Annual Rate (EAR). This value tells you what is the interest rate on a yearly basis and thus helps you make the best (i.e., the most reasonable) financial decision. If you are not sure how to do this, read the APY calculator description, where everything is explained in detail.

How to Calculate Simple Interest for Days

This is the power of compound interest everyone likes to talk about, illustrated in a concise graph. The continuous compound will always have the highest return due to its use of the mathematical limit of the frequency of compounding that can occur within a specified time period. Note that the interest rate (r) and time period (t) are in the same time units (years for the first calculation and months for the second). To calculate simple interest on a lump sum, multiply your figure by the interest rate per period (as a decimal) and then again bythe number of periods you wish to calculate for. The annual or yearly interest rate is 4.5%, and the investment period 24 months. Loans like car loans and mortgages use the simple interest calculation to find interest owed.

Simple Interest Calculator

Simple interest is used when you pay back a loan because you only pay interest on the current value of the loan, not the previous interest that has accrued. Calculate the interest earned and the future value of an investment using simple interest by entering the principal, rate, and time below. This online interest calculator compounds on a monthly debit balance definition basis, helping you determine the affects of compounding on interest-earning investments. Interest is a fee that is paid by a borrower to an investor, compensating the investor for the use of their funds. Interest rates are one way financial institutions encourage deposits – and they’re also a way for them to make money from borrowers.

Loan Calculators

Likewise, to calculate simple interest month-wise, use the number of months for t and divide the interest rate by 12. The simple interest calculation is typically used for auto loans and student loans. You should not use this Simple Interest Calculator for these types of loans however. To calculate simple interest on a CD you’ll need to know the amount of money being invested in the CD, the interest rate, and the length of the CD term.

If the market is volatile, interest rates also change dramatically during the entire course of the term. If you do not expect to keep a loan for a long time, then a variable interest rate may be more desirable over a fixed interest rate. The downside to variable rates is that if the interest rate rises, you may not be able to meet your payment obligations. Anyone who wants to estimate compound interest in their head may find the rule of 72 very useful. Not for exact calculations as given by financial calculators, but to get ideas for ballpark figures. It states that in order to find the number of years (n) required to double a certain amount of money with any interest rate, simply divide 72 by that same rate.

For example, let’s say you take out a $10,000 loan at 5% annual simple interest to repay over five years. You want to know your total interest payment for the entire loan. Mutual funds and exchange-traded funds (ETFs) are popular options for compounding, particularly because they provide diversification across various asset classes.

The more frequently interest is compounded within a time period, the higher the interest will be earned on an original principal. The following is a graph showing just that, a $1,000 investment at various compounding frequencies earning 20% interest. Keep in mind that although the simple interest calculation is valid, once you start making payments on a loan, the loan balance decreases. So you should not owe the total amount of simple interest on the entire loan balance over the course of making loan payments. You may also be curious how to compare several bank deposit (or loan) offers if they have different compounding periods and different interest rates.

• That’s $10,000 on the original principal plus $2,500 in interest payments.
• In the most intuitive sense, an annuity is a series of payments that are made during a specified period at equal intervals.
• So for a total accrued amount of $26,800 with an original principal of $22,000 and a term of 4 years, the simple interest rate is 5.45%.
• The following examples will show you how to solve different variables involved in simple interest calculation.
• Click the tabs to calculate the different parameters of the simple interest formula.

An amortization schedule provides a list of each loan payment, and how much of each payment goes toward loan principal or interest. With the simple interest calculator, only the interest is paid. Nothing changes with time, so we didn’t include a field that would specify your loan’s duration. $10,000 invested at a fixed 5% yearly interest rate, compounded yearly, and with a monthly contribution of $100, will grow to $66,212.12 after 20 years. This means a total interest of $32,212.12 and a return on investment of 94%.

Compounding happens when the next month’s interest charge is calculated on the new total including the unpaid balance plus the accumulated interest. Simple interest is interest that is only calculated on the initial sum (the “principal”) borrowed or deposited. Generally, simple interest is set as a fixed percentage for the duration of a loan. No matter how often simple interest is calculated, it only applies to this original principal amount. In other words, future interest payments won’t be affected by previously accrued interest.

The amount of money that is being borrowed or loaned is called the principal, also called the present value. When the money is loaned out, the person who borrows the money generally pays a fixed rate of interest on the principal for the time period he keeps the money. Although the interest rate is most commonly specified for a year, it may be specified for a week, a month, or a quarter, etc. Credit card companies often list their charges as monthly rates, sometimes it is as high as 1.5% a month. You can see that over time interest accumulates on top of principal plus interest much to the advantage of the credit card companies. But you can take advantage of the magic of compound interest with savings accounts or other interest-earning investments.

Continue reading to learn how to calculate simple interest, find out what the formula looks like and get tips on how to use the calculator. For simple interst calculations involving quarters, we divide 365 by 4 to get 91.25 days per quarter. Input three known values of principal, simple interest, rate or time and the calculator finds the missing value. In finance, interest rate is defined as the amount that is charged by a lender to a borrower for the use of assets.