Calculating Interest: Simple vs Compound Interest
Learn how to calculate interest using simple and compound formulas, with loan and savings examples.
Searching calculating interest usually means you want to know how much extra money builds up on a loan, savings balance, or investment.
Simple Interest Formula
Interest = Principal x Rate x Time
Example:
$1,000 at 5% for 2 years:
1,000 x 0.05 x 2 = $100
Compound Interest Formula
A = P(1 + r/n)^(nt)
Compound interest earns interest on prior interest as well as on principal.
Which One Applies?
- Savings and investment growth often use compound interest.
- Short classroom examples may use simple interest.
- Loans and credit products may use daily accrual, average daily balance, or amortized interest methods.
The Bottom Line
Calculating interest starts with principal, rate, and time, but the exact formula depends on whether interest is simple, compound, or accrued daily. For growth problems, use the Compound Interest Calculator.
How to Calculate: Step-by-Step Guide
Identify the interest type
Check whether the problem uses simple interest or compound interest.
Gather principal, rate, and time
These three values are needed for most interest calculations.
Apply the matching formula
Use simple interest or compound interest depending on the contract or account.