Compound Interest Calculator
15 Jan 2021
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.
How to use the compound interest calculator
Three pieces of information are required to calculate compound interest:
- Amount - how much money are you planning to save/borrow?
- 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.
- 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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