![]() ![]() ![]() If you want to compute the sum of the interest paid over a specified period, all you need to do is multiply the monthly interest by the adequate number of months or years.įor example, you may want to calculate the total interest you will receive during the next two and a half years. Now, let's try to make some further calculations. ![]() If this $1,000 is a loan, this value represents your monthly payments. If the initial $1,000 is a deposit, this is your monthly profit. To get a monthly interest, divide this value by the number of months in a year ( 12). You have just calculated your annual interest! Then multiply the original amount by the interest rate. (Note that you can also treat this $1,000 as the initial value of your loan with simple interest).įirst of all, take the interest rate and divide it by one hundred. Let's assume that you put $1,000 in your savings account. However, with our calculators, you won't feel the difference.Īre you wondering how to calculate simple interest? Here is an example that should help you understand it. Note that since simple interest is calculated only on the original amount, it's much easier to determine than compound interest. Here, we only mention its most basic definition, which states that compound interest is the interest calculated on the initial principal and the interest that has been accumulated during consecutive periods as well. If you want to assume that interest from the previous periods influences the original amount, you should apply compound interest. It is essential information to know, as with compound interest you actually earn or pay more over the considered period. In other words, with compounding, you earn the interest not only on the principal amount but also on the interest that was earned over the previous periods. Compounding means calculating interest on interest. Simple interest does not take into account the effects of compounding. Simple interest is used to estimate the interest earned or paid on a certain balance (original amount) during a particular period. Simple interest is based on the original amount, while compound interest is based on the original amount and the interest that accumulates on it in every period (for further explanations of simple and compound interest, see the section Simple and compound interest). Interest can be either simple or compounded. The interest is customarily expressed as a percentage ( %) of the original amount (principal amount, balance). It is a price that the borrower pays to the lender for using his money. Generally, interest is the cost of borrowing money. Let's start with the definition of interest. In the next sections, we will also show you some examples of simple interest calculations. What are the real-life examples of simple interest loans?.What is the simple interest equation, and how to find the value of simple interest?.What is the difference between simple interest and compound interest?.Later on, you will find the answers to the following questions: So, at the beginning of this article, we will try to answer the question “What is interest?”. Financial advisors, financial officers, stockbrokers, bankers, investment managers, and other financial experts use this term hundreds of times during their everyday activities. Students of the economy become familiar with this term during their very first lectures. The interest is one of the most often used words in finance. ![]()
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