The concept of compound interest exists ever since mankind started dealing in currencies. Whether you deal with village landlords and 'Seths', banking and financial institutions, or big corporate investors, a thorough understanding of compound interest is extremely essential.
After all, who is not interested in taking the benefit of the power of compounding!
In layman's language, compound interest simply means the interest earned on interest. When a sum of money is subjected to compound interest, it gets multiplied periodically with respect to the pre-decided parameters.
Well, if you are thinking about how much you will ultimately earn or have to pay, a compound interest calculator can help determine the future outcomes of your investments or loans that are under a compound interest system.
A lot of online players are providing well-designed and programmed platforms where you will get to know everything about compound interest just by inputting the data available to you.
How to calculate compound interest?
To calculate compound interest, the following formula is used:
A= P{(1+r)/n}^(nt)
In the above formula,
P= principal amount,
r= interest rate (in ratio or decimal number),
n= number of times the interest applied per period,
t= number of time period cycles considered.
Simple vs Compound interest
Simple interest and compound interest are the two most used types of interest systems. The basic differences in these systems are given below:
Simple Interest | Compound Interest |
I= (PRT)/100
|
A= P{(1+r)/n}^(nt)
|
For example, if a sum of 1 lakh is lent at an interest rate of 10% for a tenure of 5 years, then how much would one get paid at the end?
Answer:
Total interest = (1,00,000×10×5)/100 = 50,000.
The net amount owed = Rs.1,50,000/-
If the same credentials are subjected to the compound interest mechanism, where interest is compounded on an annual basis, then what would be the net amount?
Answer:
Applying the above formula:
Total interest = Rs.61,051/-
Net amount owed = Rs.1,61,051/-
How can compound interest calculators help you?
Calculation of compound interest is not that straightforward, as the principal keeps revising periodically.
Suppose a sum of Rs.1,00,000 is deposited at 5% for 5 years, compounding annually. So, at the end of the 1st year, the principal amount becomes Rs.1,05,000. For the second year, the interest will be calculated on Rs.1,05,000 as the principal amount.
Again, the principal would be revised to Rs.1,10,250. For the third year, interest calculation will be done for Rs 1,10,250.
Just think, how cliché it would become for larger sums and more frequency. This is where a good and reliable calculator comes as a savior. It not only gives you the estimated data instantly but also accurately.
You would not like to go for an investment or loan scheme without getting the numbers and calculations clear.
Advantages of a compound interest calculator
Given how important loans, investments, and debts have become, a compound interest calculator comes as a brilliant package for any type of future financial guidance.
Free to Use: You don't have to spend a penny on this as many online platforms offer compound interest calculators.
Unlimited Usage: There are no restrictions on the number of uses. Use the calculators as many times as you need to solve your doubts.
Convenience: Most of them provide a user-friendly interface so that you don't face any problem using it.
Quick Services: The results can be obtained in nanoseconds. Input the numbers that you have in your mind and get the statistics with a click.
- Less Chance of Becoming a Fraud Victim: Use the calculator with a number of combinations and find yourself a better deal; whether debt or investment. No one can blindsight you anymore.
Frequently Asked Question
Q1. What does compounding interest mean?
Ans. In simple words, it is interest on interest. The principal amount keeps revising on a periodical basis, and you get more interest, as interest gets added to the principal amount.
The formula used to obtain the net amount is: A= P{(1+r)/n}^(nt), wherein
P is the Principal amount, r is the interest rate (in ratio or decimal number), n is the number of times the interest is applied per period, and t is the number of time period cycles.
Q2. Is it better to compound daily or monthly?
Ans. Well, the more the frequency of interest, the more would be the amount generated. So, if it is compounding on a daily basis, then the net amount would be higher.
Now, it entirely depends on where you stand. If you are at the receiving end, then 'daily scheme' will be optimum. If you are taking debt, then you should opt for a monthly or yearly compounding mechanism.
Q3. How many times can I use the calculator?
Ans. Use it as many times as you want. It is available right on your desktop, laptop, or mobile screen. The calculators are absolutely free and can be used anytime at your convenience.
Q4. What is the difference between CI and SI?
Ans. Simple interest is calculated for a fixed principal amount for certain tenure. In the compound interest method, the principal gets updated from time to time and hence the total interest generated is higher.