What is interest?
Interest is the cost of borrowing money or the reward for investing it. It is calculated as a percentage of the principal amount over a given period.
How is simple interest calculated?
Simple interest is calculated only on the principal amount. Formula: Interest = Principal × Annual rate × Time. For example, €1,000 at 5% annual rate for 3 years will earn €150 in interest. Final amount: 1000 + 150 = €1,150.
How is compound interest calculated?
Compound interest is calculated on the principal and on previously accumulated interest. Formula: Final amount = Principal × (1 + r/n)^(n×t), where r is the annual rate, n is the compounding frequency, and t is time in years. For example, €1,000 at 5% for 3 years (monthly compounding) = €1,161.62.
What is the difference between simple and compound interest?
Simple interest is calculated only on the principal, so earnings grow linearly. Compound interest is calculated on the principal plus accumulated interest, so earnings grow exponentially. The longer the period, the greater the difference between the two methods.
What is compounding frequency?
Compounding frequency indicates how often interest is added to the principal. The more frequently interest is compounded, the greater the final return. This calculator supports yearly, quarterly, monthly and daily compounding.
Interest calculation examples
Term deposit: €5,000 at 3% annual rate for 2 years (monthly compounding). Final amount: €5,308.79. Interest earned: €308.79.
Savings account: €10,000 at 1.5% annual rate for 5 years (yearly compounding). Final amount: €10,772.84. Interest earned: €772.84.
What is the effective interest rate?
The effective interest rate (APY) shows the true annual return accounting for compounding frequency. It is always equal to or greater than the nominal rate. For example, 5% nominal interest with monthly compounding equals 5.12% effective interest.