How this interest calculator works
Interest is the price of using money. With simple interest, you earn (or pay) interest only on the original principal, so the amount grows by the same sum every year. With compound interest, the interest earned is added to the balance and then earns interest itself, so growth speeds up over time. This calculator applies both methods to the same principal, rate and time and shows the difference side by side.
The formulas in plain words
Simple interest = P × R × T ÷ 100 Compound interest = P × (1 + R ÷ (100 × n))n × T − P
P is the principal, R the yearly interest rate in percent, T the time in years and n the number of times interest is compounded each year: 1 for yearly, 2 for half-yearly, 4 for quarterly, 12 for monthly and 365 for daily. The more often interest compounds, the more you earn.
Worked example
Take ₹1,00,000 at 8% a year for 5 years.
- Simple interest: 1,00,000 × 8 × 5 ÷ 100 = ₹40,000
- Compound interest, yearly: ₹46,933
- Compound interest, quarterly: ₹48,595
- Compound interest, monthly: ₹48,985
Over five years, quarterly compounding earns about ₹8,600 more than simple interest. Over 20 or 30 years the gap becomes much larger.
Effective annual rate
When interest compounds more than once a year, the real yearly return is higher than the quoted rate. The calculator shows this as the effective annual rate. For example, 12% compounded monthly works out to about 12.68% a year. It is the fairest way to compare a deposit or loan that compounds quarterly with one that compounds monthly.
Where each type is used
- Simple interest: some short-term personal loans, car loan flat-rate quotes and interest on certain bonds paid out regularly.
- Compound interest: fixed deposits, recurring deposits, savings accounts, PPF and most investments, as well as credit card balances.
- When borrowing, ask whether the rate is flat (simple) or reducing-balance; a flat rate is far costlier than it looks.
Frequently asked questions
What is the difference between simple and compound interest?
Simple interest is calculated only on the original principal. Compound interest is calculated on the principal plus all interest already added, so it grows faster over time.
How do I calculate simple interest?
Multiply the principal by the rate and the time in years, then divide by 100: SI = P × R × T ÷ 100. ₹50,000 at 6% for 3 years earns ₹9,000.
How do I calculate compound interest?
Use A = P × (1 + R ÷ (100 × n))^(n × T), where n is how many times interest is compounded per year. Compound interest is A − P.
Does compounding frequency make a big difference?
It helps, but less than the rate and time. Moving from yearly to monthly compounding at 8% raises the effective yearly rate from 8% to about 8.30%.
What is the effective annual rate?
It is the actual yearly return after compounding. It lets you compare offers with different compounding frequencies on equal terms.