A = P(1+r/n)^(nt): principal × growth with n compounding periods per year.
An interest calculator is a tool that figures out how much interest you will earn on savings or pay on a loan. You enter the principal amount, the interest rate, and the time period, and it calculates the interest earned or charged. It works with both simple interest and compound interest, the two basic ways interest is calculated.
Understanding interest matters for everyday money decisions: the cost of borrowing, the growth of savings, and comparing financial products that quote interest in different ways.
Simple interest is calculated only on the original principal. The formula is:
I = P × r × t
Here, I is the interest, P is the principal, r is the interest rate per period, and t is the number of periods. The interest earned or charged is the same every period.
Compound interest is calculated on the principal plus any interest already added. The formula for the final amount is:
A = P(1 + r)^t
Here, A is the final amount including interest. Because each period's interest joins the balance and earns interest itself, the balance grows faster than with simple interest — and the gap gets bigger the longer the time period and the higher the rate.
In this example, the rate is assumed for illustration. You invest $5,000 at 5% for 3 years.
With simple interest: I = 5,000 × 0.05 × 3 = $750.00. The final balance is $5,750.00.
With compound interest (compounded yearly): A = 5,000 × (1.05)^3 = $5,788.13, so the interest is $788.13. Compounding adds an extra $38.13 because each year's interest also earns interest in the following years.
This small gap shows the core difference: simple interest grows in a straight line, while compound interest grows on a curve that steepens over time.
Interest earned on both the original principal and previously earned interest — money grows faster than with simple interest.
Yes. More frequent compounding (monthly vs yearly) gives a slightly higher effective return at the same nominal rate.
