Calculate both simple and compound interest. Compare different interest types and understand how your money grows over time.
Simple interest is calculated only on the principal, while compound interest is calculated on the principal plus accumulated interest.
Compound interest earns $1,289 more over 10 years!
Given: You borrow $5,000 at 6% simple interest for 3 years.
Solution:
P = $5,000, r = 0.06, t = 3
I = P × r × t = 5000 × 0.06 × 3
I = $900
Total to repay = $5,000 + $900 = $5,900
Given: You deposit $8,000 in a savings account at 3.5% compound interest, compounded monthly, for 5 years.
Solution:
P = $8,000, r = 0.035, n = 12, t = 5
A = 8000(1 + 0.035/12)60
A = 8000 × 1.1908 = $9,526.49
Interest earned = $1,526.49
Given: $15,000 CD at 4.5% annual interest, compounded quarterly, for 2 years.
Solution:
P = $15,000, r = 0.045, n = 4, t = 2
A = 15000(1 + 0.045/4)8
A = 15000 × 1.0938 = $16,407.02
Interest earned = $1,407.02
Given: $20,000 at 8% for 10 years - compare simple vs. compound interest.
Simple Interest:
I = 20000 × 0.08 × 10 = $16,000
Final Amount = $36,000
Compound Interest (annual):
A = 20000(1.08)10 = $43,178.50
Interest = $23,178.50
Difference: Compound earns $7,178.50 more!
Given: Credit card balance of $2,500 at 22% APR compounded daily for 1 year (if no payments made).
Solution:
P = $2,500, r = 0.22, n = 365, t = 1
A = 2500(1 + 0.22/365)365
A = 2500 × 1.2461 = $3,115.18
Interest charged = $615.18
This shows why paying credit card balances quickly is important!
Interest is the cost of borrowing money or the earnings from lending money. It's typically expressed as an annual percentage rate (APR).
Simple interest is calculated only on the original principal throughout the entire loan or investment period. It's commonly used for:
Compound interest adds earned interest back to the principal, so future interest calculations include previously earned interest. Used for:
More frequent compounding results in more interest earned or charged:
APR (Annual Percentage Rate) is the simple interest rate. APY (Annual Percentage Yield) includes the effect of compounding. APY will always be equal to or higher than APR.