It’s your money making more money over time. Compound interest can grow your wealth because it is interest that’s earned on top of interest already earned. This concept applies not just to the money saved in your bank account, but on returns earned on your investments too.

The borrower may chose to use the funds to invest in a business venture and thus be becomes an investor. Money is channeled through financial institutions such as banks. A saver saving with a bank account seeks to keep the money in the bank as it earns him interest.

The financial system brings together savers and borrowers by channeling funds from savers to borrowers while giving savers claims on borrowers´ future income. The financial system achieves this transfer by creating financial instruments, which are assets for savers and liabilities for borrowers.

Savers place deposits with banks, and then receive interest payments and withdraw money. Borrowers receive loans from banks and repay the loans with interest. In turn, banks return money to savers in the form of withdrawals, which also include interest payments from banks to savers.

Compound interest makes a sum of money grow at a faster rate than simple interest, because in addition to earning returns on the money you invest, you also earn returns on those returns at the end of every compounding period, which could be daily, monthly, quarterly or annually.

While both types of interest will grow your money over time, there is a big difference between the two. Specifically, simple interest is only paid on principal, while compound interest is paid on the principal plus all of the interest that has previously been earned.

Compound interest method: Compounding of interest is very common. Under this method, the interest is charged on principal plus any accumulated interest. The amount of interest for a period is added to the amount of principal to compute the interest for next period.

Simple Interest Equation (Principal + Interest)

1. A = Total Accrued Amount (principal + interest)
2. P = Principal Amount.
3. I = Interest Amount.
4. r = Rate of Interest per year in decimal; r = R/100.
5. R = Rate of Interest per year as a percent; R = r * 100.
6. t = Time Period involved in months or years.

Calculation: You can calculate your total interest by using this formula: Principal Loan Amount x Interest Rate x Time (aka Number of Years in Term) = Interest.

To calculate the monthly interest, simply divide the annual interest rate by 12 months. The resulting monthly interest rate is 0.417%. The total number of periods is calculated by multiplying the number of years by 12 months since the interest is compounding at a monthly rate.

You can calculate Interest on your loans and investments by using the following formula for calculating simple interest: Simple Interest= P x R x T ÷ 100, where P = Principal, R = Rate of Interest and T = Time Period of the Loan/Deposit in years.

Generally, simple interest paid or received over a certain period is a fixed percentage of the principal amount that was borrowed or lent. For example, say a student obtains a simple-interest loan to pay one year of college tuition, which costs $18,000, and the annual interest rate on the loan is 6%.

Simple interest is interest calculated on the principal portion of a loan or the original contribution to a savings account. Simple interest does not compound, meaning that an account holder will only gain interest on the principal, and a borrower will never have to pay interest on interest already accrued.

Essentially, simple interest is good if you’re the one paying the interest, because it will cost less than compound interest. However, if you’re the one collecting the interest—say, if you have money deposited in a savings account—then simple interest is bad.

Simple interest is calculated by multiplying the daily interest rate by the principal, by the number of days that elapse between payments. Simple interest benefits consumers who pay their loans on time or early each month. Auto loans and short-term personal loans are usually simple interest loans.

What is simple interest? Simple interest is money earned only on the original sum of money invested. 2. Here’s how to calculate interest earned on a savings account: If you put $20,000 in a simple interest savings account at a rate of 1% monthly interest, you’ll earn $200 each month.

Simple interest is mainly used for easy calculations: those generally for a single period or less than a year, though they also apply to open-ended situations, such as credit card balances.

Principal Amount Formulas We can rearrange the interest formula, I = PRT to calculate the principal amount. The new, rearranged formula would be P = I / (RT), which is principal amount equals interest divided by interest rate times the amount of time.

In the context of borrowing, principal is the initial size of a loan; it can also be the amount still owed on a loan. If you take out a $50,000 mortgage, for example, the principal is $50,000. If you pay off $30,000, the principal balance now consists of the remaining $20,000.

The formula to calculate the FD returns is, A=P(1+r/n)^n*t. Here, A is the maturity amount, P is the principal amount invested in the FD, r is the rate of interest and n is the tenure.

To calculate the monthly payment, convert percentages to decimal format, then follow the formula:

1. a: 100,000, the amount of the loan.
2. r: 0.005 (6% annual rate—expressed as 0.06—divided by 12 monthly payments per year)
3. n: 360 (12 monthly payments per year times 30 years)

Your monthly payment on a personal loan of $10,000 at a 5.5% interest rate over a 1-year term would be $858.

If you borrow $20,000 at 5.00% for 5 years, your monthly payment will be $377.42.

To calculate your monthly car loan payment by hand, divide the total loan and interest amount by the loan term (the number of months you have to repay the loan). For example, the total interest on a $30,000, 60-month loan at 4% would be $3,150.

roughly $600 a month

CALCULATORS ARE GREAT, BUT THEY’RE NOT PERFECT Depending on which calculator you use, it can spit out a variety of important numbers. That’s kind of a big deal, because without knowing your APR, no calculator can give you an accurate answer.

In other words, the purchase price of a house should equal the total amount of the mortgage loan and the down payment. Often, a down payment for a home is expressed as a percentage of the purchase price. As an example, for a $250,000 home, a down payment of 3.5% is $8,750, while 20% is $50,000.

For example, you want to buy a house for Rs You would make a down payment of 20% or Rs * 0.2 = Rs The bank would sanction the home loan of Rs You have processing fees of 1% of the loan amount or Rs * 0.01 = Rs 40,000.

Example Required Income Levels at Various Home Loan Amounts

Typically, mortgage lenders want you to put 20 percent down on a home purchase because it lowers their lending risk. It’s also a “rule” that most programs charge mortgage insurance if you put less than 20 percent down (though some loans avoid this).