Lenders charge two types of interest to earn money on the amount borrowed: simple or amortized. Short-term loans, such as payday loans and credit cards, usually use simple interest. Simple interest is calculated based on the principal amount borrowed and the interest rate.
Simple interest is the most basic form of interest calculation. It only takes into account the initial principal and the interest rate. It does not consider compounding, which is the interest earned on both the principal and the accumulated interest from previous periods.
To calculate simple interest, you need to know the principal amount, the interest rate, and the time period. The formula for simple interest is: Interest = (Principal × Rate × Time) / 100. This formula helps determine the cost of borrowing money and the interest earned on savings.
Let's consider an example to understand how simple interest works. Say you put a sum of $800 into a savings vehicle with a 5% annual simple interest rate. You'll enter your initial sum, the interest rate, and the time period into a simple interest calculator. The calculator will then give you the interest earned over the specified time.
NerdWallet offers a compound interest calculator that can help you determine how much your money can grow with compound interest. Compound interest takes into account the initial principal and the accumulated interest from previous periods. It is often used for long-term investments.
If you have a certificate of deposit (CD), you can use a simple CD interest calculator to determine how much you'll earn over the term of the CD. This calculator considers the initial deposit, the interest rate, and the CD's term to calculate the total interest earned.
It's important to regularly check how much interest your savings account is earning. By using a savings account calculator, you can see how your savings are growing over time and decide if it's time to change banks to earn higher interest rates.
The formulas for calculating interest growth on savings accounts can help you determine how much your savings will grow. By plugging in the principal amount, interest rate, and time period, you can calculate the future value of your savings.
Understanding the simple interest formula is essential for borrowers and savers alike. By knowing how to calculate simple interest, you can budget your finances better and make informed decisions about borrowing or saving money.
If you're curious about how much your money can grow over time, you can use a free savings calculator. This calculator takes into account the interest growth on all your savings accounts and helps you visualize the potential growth of your savings.
