Question 1

What's the difference between simple and compound interest?

Accepted Answer

Simple interest calculates interest only on the principal amount each period. Compound interest adds earned interest to the principal, so you earn interest on interest. This makes compound interest grow faster over time.

Question 2

How is deposit interest calculated?

Accepted Answer

Deposit interest is typically calculated using compound interest. Based on your bank's interest rate and term, you can calculate returns. For example, $10,000 at 5% annual rate for 1 year: 10,000 × 1.05 = $10,500 total, $500 interest earned.

Question 3

What is effective interest rate?

Accepted Answer

Effective interest rate shows the actual cost or return of compound interest. It differs from nominal (stated) rate. For example, 12% nominal rate compounded monthly equals approximately 12.68% effective annual rate.

Question 4

How is loan interest calculated?

Accepted Answer

Loan interest is typically calculated with monthly compounding. If a bank offers 12% annual rate, that's 1% monthly. Monthly payment is calculated using principal, interest rate, and term through an amortization formula.

Question 5

How do I determine the time period?

Accepted Answer

Time period is how long your money stays invested, entered in years in our calculator. For 6 months enter 0.5, for 18 months enter 1.5. Simple interest works for short terms, compound interest is better for longer periods.

Interest Calculator

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