Compound Interest Calculator

Luis Anaya

Luis Anaya

15 Jan 2021

Compound Interest Calculator

Compounding interest is calculating interest on interest.

When you are saving money compounding means you are reinvesting your interest to earn additional interest payments. However, if you are borrowing and not making regular interest payments, the amount you owe will increase quicker as interest becomes due on the existing loan amount plus interest accrued to date.

Compound interest can be calculated on:

  • 1. Loan Interest
  • 2. Savings Interest

Although the calculation formula is the same for loans and savings, in the case of savings interest compounding works in your favour, while for loans interest compounding works against you.

inputs
results
Total Amount (£)
0
Compounded Interest (£)
0

Demo Data

Starting amount: £1000

Annual Interest Rate: 3%

Number of Years: 5

yearinterestbalance
1301030
230.91060.9
331.831092.73
432.781125.51
533.771159.27

If interest compounding is not applied then the yearly profile would like this:

yearinterestbalance
1301030
2301060
3301090
4301120
5301150

Compound interest therefore accounts for a difference of £9.27 in the example shown.

The starting amount and the interest rate impact the overall size of interest due to compounding.

However, it is also important to understand that the frequency at which interest is compounded will impact the size of interest due to compounding.

The more frequently compound interest is calculated, the larger the amount of interest due to compounding at the end of the term.

How to use the compound interest calculator

Three pieces of information are required to calculate compound interest:

  1. Amount - how much money are you planning to save/borrow?
  2. Interest rate - this is a percentage set by the bank that determines how much money you earn on your savings or incur on your borrowings.
  3. Year - otherwise known as the term, this is how long you will hold your savings or loan for.

Example: The compound interest calculator starts by multiplying the Amount (A) by the Interest Rate (IR) to calculate the Interest Amount (IA) due after the first period.

A = £1000

IR = 3%

IA = A * IR

IA = 1000 * 0.03

IA = £30

In the second period the Amount is no longer £1000 because we must add the £30 that was due after period 1, meaning the period 2 calculation is as follows:

A = £1030

IR = 3%

IA = A * IR

IA = 1030 * 0.03

IA = £30.9

The shows that because compounding calculaties interest on interest the, the amount of interest due after period 2 has increased from £30 to £30.90. The compound interest calculator will repeat this process for the number of years given to the calculator.

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