We all know about Simple interest. You loan an amount of money. The moneylender applies an annual interest on it and when you pay the money back, you have to pay back the principal and the interest on it accumulated during that period. Simple as that.
However, Compound Interest is a bit trickier. By definition, it is an “interest on interest to the principal sum of a loan or deposit.” It basically means that when you loan an amount of money and the lender applies compound interest on that, you have to pay an interest on the principal plus the accumulated interest over the years or months. In other words, the interest is added back to the principal amount and then calculated for further interest. You can say that the interest is added exponentially rather than linearly as in simple interest. Let us see how that works.
Suppose you have taken a loan of Rs. 10000 from a bank and the bank is charging a compound interest of 10% per annum. The table given below shows how your interest will accumulate over a period of 3 years.
|YEAR||INITIAL AMOUNT||INTEREST (10%)||FINAL AMOUNT|
|1||10000||10000 x 10%= 1000||11000|
|2||11000||11000 x 10%= 1100||12100|
|3||12100||12100 x 10%= 1210||13310|
That is how compound interest is calculated. Now, it looks easy on simple amounts over a small period of time. But if you have to calculate the compound interest on, let’s say, Rs.679270 over a period of 8 years, it might get a bit tricky. But do not worry. Here is Compound Interest Formula for calculating compound interest. The formula is given by-
You can do all that or you can do the clever thing, which is, use the Byju’sCompound Interest calculator which allows you to calculate the compound interest on any sum for any period of time. All you need to do is input the numbers and relax. The Byju’s Compound Interest Calculator will do the rest for you. It is true for all values, however small or big.
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