Is the future value of money that the loan will be worth after compounding the interest. Simple interest is the interest paid only on the principal, whereas, compound interest is the interest paid on both principal and interest compounded at regular intervals. Interest PayableInterest Payable is the amount of expense that has been incurred but not yet paid. Therefore, the 2nd option is the cheaper one despite higher interest rates because the 1st option is more expensive due to annual compounding. Let’s take an example to understand the calculation of Interest in a better manner. The income earned on this product will be 161,154.51 + 10,783.90, which is equal to 171,938.41.

• Note that you should multiply your result by 100 to get a percentage figure (%).
• The information you need for any of these calculations is generally the same, but the math is a bit different for each.
• In contrast, for fixed and recurring deposits, interest is paid based on customer request, which could be monthly, quarterly, half annually, or yearly.
• In other words, future interest payments won’t be affected by previously accrued interest.

And finally, the period, for which the money is borrowed or deposited is called Time. Our Interest Calculator can help determine the interest payments and final balances on not only fixed principal amounts but also additional periodic contributions. There are also optional factors available for consideration, such as the tax on interest income and inflation. To understand and compare the different ways in which interest can be compounded, please visit our Compound Interest Calculator instead. The ClearTax Simple Interest Calculator asks you to fill the compounding frequency from the daily, weekly, monthly, quarterly and other options.

Variations of the compound interest formula

Calculate the interest expense to be incurred by Dennis. Invest Corp has launched a new investment product that has piqued Shankar’s interest. To invest in this scheme, Shankar needs to put in an initial amount of 50,000, and the investment will mature after 15 years. The guaranteed rate of interest is 9.72%, which is tax-free, and the product also provides a bonus at the end of 15 years. You are required to compute the total income earned in this product assuming Shankar decides to invest in the same, and at the end of 15 years, the bonus income is 10,783.90.

This example shows monthly compounding with a 5% interest rate. ClearTax offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. ClearTax serves 2.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India. You can compare the simple interest rates against the compound interest rates and determine the interest you pay on any loan. Apply the formula and calculate the compounded interest.

In simple words, the interest rate is the rate at which the lender charges the amount over the principal landed by the lender. The interest rate is directly proportional to risk, as risk is involved when a lender lends an amount to the borrower. It is also called compensation for an opportunity lost.

Income Tax Filing

In either case, whether you will be collecting the interest or paying the interest, the amount of the principal is generally symbolized by the variable P.

Deb Russell is a school principal and teacher with over 25 years of experience teaching mathematics at all levels. The Formula for simple interest enables us to find out the interest amount if the principal amount, rate of interest and time duration is given. Our investment balance after 10 years therefore works out at $20,720.91. This formula is useful if you want to work backwards and calculate how much your starting balance would need to be in order to achieve a future monetary value. Efiling Income Tax Returns is made easy with ClearTax platform. Just upload your form 16, claim your deductions and get your acknowledgment number online.

Simple interest is generally applied for the short term. From the perspective of an analyst or accountant, the concept of interest expense is very important because it is used to manage the financial performance of any company. Interest calculation helps the companies to recognize the financial expense incurred over the entire tenure of the loan. The formula for simple interest can be derived as a product of outstanding loan amount, interest rate, and tenure of the loan. The longer you leave your money invested and earning compound interest, the more your money will grow.

Simple Interest Formula

In this article, we are going to cover the key concepts of Interest along with the various types of questions, and tips and tricks. We have also added a few solved examples, which candidates will find beneficial in their exam preparation. Read the article thoroughly to clear all the doubts regarding the same. In contrast, an interest rate is the borrowing cost of the principal, that is, the loan amount, which can be either fixed or variable.

There is another kind of interest which we call a compound interest. You can use the ClearTax Simple Interest Calculator from the comfort of your home. It is an easy to use tool where you enter the compounding frequency, principal amount, interest rate and the period. The ClearTax Simple Interest Calculator shows the interest you earn on the deposit in seconds. Use our free online calculator to solve challenging questions.

As a result, the interest earned over time can be much higher than simple interest, which only calculates interest on the initial amount. Multiply your initial balance by one plus the annual interest rate raised to the power of the number of time periods . Subtract the initial balance from the result if you want to see only the interest earned.

As you saw in the previous example, compound interest grows faster than simple interest by adding the interest back to the principal at certain times. Compounding quarterly is more valuable than compounding annually. Compounding monthly is even more valuable than compounding quarterly.

Take a look at some of the simple interest examples below

At what percent will Rs. 2500 amount to Rs. 6000 in 5 years? Let’s undertake a simple example to understand the concept of simple interest. Let’s plug those figures into our interest formula formulae and use our PEMDAS order of operations to create our calculation… Within the first set of brackets, you need to do the division first and then the addition .

Rule of 72 formula

With compounding, the value of money grows very quickly. A small number can grow into a large number in only a few steps. Calculate the simple interest and total amount due after five years. However, if Derek has a marginal tax rate of 25%, he will end up with $239.78 only because the tax rate of 25% applies to each compounding period.

In that case, divide by 12, to find the monthly interest rate of 1.25% per month. These two rates, 15% per year or 1.25% per month, are equivalent to each other. For example, if you have made a loan to a friend of $2,000, the principal loaned would be $2,000.

Ans.2 Simple interest is a one time charge for the use of the amount of money that is borrowed. Compound interest is a plan in which interest is computed on a schedule, usually consisting of an equal period of time, and is based on the balance of the outstanding loan. Simple interest is a one time charge for the use of the amount of money that is borrowed. Simple interest finds its relevance in the way interest is calculated by Banks on the savings bank account and term deposits held by depositors.

Banks or any financial organization calculate the amount based on compound interest only. Interest is the cost you pay to borrow money or the compensation you receive for lending money. You might pay interest on an auto loan or credit card, or receive interest on cash deposits in interest-bearing accounts, like savings accounts or certificates of deposit . To use an online loan interest rate calculator, enter the loan amount you want to avail in the pertinent field. Next, enter the rate of interest charged followed by the repayment period you wish to opt for.