Find the answers to common questions about calculating compound interest
What is compound interest in simple terms?
Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest rather than paying it out so that interest in the next period is then earned on the principal sum plus previously accumulated interest.
What is difference between simple interest and compound interest?
Simple interest is based on the principal amount of a loan or deposit, while compound interest is based on the principal amount and the interest that accumulates on it in every period. Since simple interest is calculated only on the principal amount of a loan or deposit, it's easier to determine than compound interest.
Where is compound interest used?
Banks typically pay compounded interest on deposits, a benefit for depositors. If you are a credit card holder, knowledge of the workings of compound interest calculations may be an incentive to pay off your balances quickly. Credit card companies charge interest on the principal amount and the accumulated interest.
What is the formula used to calculate the compound interest?
Formula Compounded Interest = Initial Investment (1+ r) ^ n - Initial Investment Future Value of Investment = Initial Investment (1+ r) ^ n r = interest rate per period n = number of periods
Want new calculator updates?
Subscribe below to receive emails when we launch new calculators 📧