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Compound interest is the interest on interest. In simple terms, the addition of interest to the principal sum of the loan or deposit is called compound interest. If you have an investment account, you earn money on your interest. The interest that you earn is reinvested, instead of paying it out. If you are repaying a loan that charges compound interest, you are paying interest on the interest. If you earn compound interest on your investment, it grows without any further deposits. You may increase the deposits to raise the efficacy of the compound interest.
The rate at which you borrow or lend money is called the simple interest. If a borrower takes money from a lender, an extra amount of money is paid back to the lender. The borrowed money which is given for a specific period is called the principal. The extra amount which is paid back to the lender for using the money is called the interest.
You calculate the simple interest by multiplying the principal amount by the number of periods and the interest rate. Simple interest does not compound, and you don’t have to pay interest on interest. In simple interest, the payment applies to the month’s interest, and the remainder of the payment will reduce the principal amount.
A compound interest calculator is a simulation, that shows how investments grow with time. You need three parts to calculate the compound interest that is the principal amount, interest rate, and time for which the money is invested. The compound interest calculator consists of a formula box, where you enter the compounding frequency, principal amount, rate of interest, and the period. The calculator will show you the future value of your investments.
A simple interest calculator is a utility tool that calculates the interest on loans or savings without compounding. You may calculate the simple interest on the principal amount on a daily, monthly, or yearly basis. The simple interest calculator has a formula box, where you enter the principal amount, annual rate, and period in days, months, or years. The calculator will display interest on the loan or the investment.
The compound interest calculator works on the mathematical formula:
A = P (1+r/n)^nt
P = Principal Amount
n = Compounding frequency
r = Rate of
interest
t = Number of time periods elapsed
A = Final amount
For example, you have deposited Rs 10,000 in an FD at an interest rate of 6% for five years. You have the frequency of compounding as a quarterly (n=4).
A = 10,000 (1+0.06/4)^4*5
A = Rs 13,468.
Interest = A – P = 13,468 – 10,000 = Rs 3,468.
The simple interest calculator will show the accrued amount that includes both principal and the interest. The simple interest calculator works on the mathematical formula:
A = P (1+rt)
P = Principal Amount
R = Rate of interest
t = Number of
years
A = Total accrued amount (Both principal and the interest)
Interest = A – P.
Let’s understand the workings of the simple interest calculator with an example. The principal amount is Rs 10,000, the rate of interest is 10% and the number of years is six. You can calculate the simple interest as:
A = 10,000 (1+0.1*6) = Rs 16,000.
Interest = A – P = 16000 – 10000 = Rs 6,000.
The ClearTax Simple Interest Calculator shows you the simple interest you have earned on any deposits. To use the simple interest calculator:
The ClearTax Compound Interest Calculator shows you the compound interest you have earned on any deposits.
To use the compound interest calculator: