Interest Calculator

Interest Calculator

Interest is the cost paid by a borrower to a lender for using their money. It can be expressed as either a percentage or a fixed amount. Interest is a core concept behind most financial tools and products.

There are two main types of interest:

• Simple Interest

• Compound Interest

Simple Interest

Simple interest is calculated only on the original amount (called the principal).

Example:

Derek borrows $100 from a bank for 1 year at 10% interest.

• Interest = $100 × 10% = $10

• Total repayment = $100 + $10 = $110

If Derek borrows the same $100 for 2 years, with interest applied yearly:

• Year 1 Interest = $10

• Year 2 Interest = $10

• Total = $100 + $10 + $10 = $120

Formula:

For more complex schedules (e.g., monthly or daily), the formula becomes:

However, simple interest is rarely used in real-world banking or investing. Most interest is compound interest.

Compound Interest

With compound interest, interest is calculated not just on the original principal, but also on accumulated interest from previous periods.

Example:

Derek borrows $100 for 2 years at 10% interest, compounded annually.

• Year 1: $100 × 10% = $10, Total = $110

• Year 2: $110 × 10% = $11, Total = $121

So, Derek pays $121 instead of $120 with simple interest. This happens because interest earns more interest.

The more frequently interest is compounded (monthly, daily, etc.), the more total interest will accumulate.

Power of Compounding

Compounding might seem slow at first, but over time, the difference grows significantly. For example, a $1,000 investment at 20% interest grows faster when compounded monthly compared to annually.

The highest possible return is achieved with continuous compounding, where interest is added infinitely often.

Rule of 72

This rule gives a quick way to estimate how long it takes to double your money at a given interest rate.

Formula:

Example: At 8% interest, money doubles in 9 years (72 ÷ 8 = 9).

This works best for rates between 6% and 10%, but it’s a good approximation up to 20%.

Fixed vs. Floating Interest Rates

• Fixed Rate: Doesn’t change over time. Your payments stay the same.

• Floating Rate: Changes based on a reference rate (e.g., Federal Reserve Rate, LIBOR). Loan payments can vary.

The calculator here uses fixed rates only.

Contributions

The calculator also supports regular contributions, which is helpful for saving plans. You can choose to make deposits at the beginning or end of each period. Depositing earlier results in more interest over time.

Taxes on Interest

Interest earned is often taxable, especially on savings accounts, bonds, or CDs. Tax rates vary:

• Federal bonds: taxed federally, but often not at state/local level.

• Corporate bonds: usually fully taxed.

Example:
Saving $100 at 6% for 20 years, tax-free:

But if taxed at 25% each year, the ending balance is only $239.78.

Impact of Inflation

Inflation reduces the purchasing power of money over time. Even if your savings grow, you might be able to buy less in the future.

• U.S. average inflation: ~3%

• Historical S&P 500 average return: ~10%

Inflation-adjusted returns are essential for planning.

Tax + Inflation = Lower Real Returns

For example:

• Tax rate: 25%

• Inflation: 3%

• Minimum needed return just to maintain value = 4% or more

Growing money in real terms is harder than it looks, which is why smart investing and saving strategies are key.

Related Calculators:
Auto Loan Calculator, Loan Calculator

External Resources:
Interest Calculator on Calculator.net