Compound Interest Calculator
This compound interest calculator and investment maturity tool will help you see how fast your money can grow through compounding interest. Compute the savings benefits of reinvesting interest on interest over time. What is Compound Interest? | How Does it Work? | Advantages of Compound Interest | Why is Compound Interest So Powerful?
After 0 periods your investment will be worth $0.
- Initial Investment:
- Interest Earned:
What is Compound Interest?
Compound interest is the compounding of interest on the original amount of money invested or lent, plus the interest already added to that amount. The compounding of the principal amount plus interest, when working out interest, means that the interest accrued is higher than when simple interest is applied. With simple interest, the total amount of interest will be less than compounded interest, as interest is only earned or charged on the principal amount.
How Does it Work?
Compound interest works by adding interest to the principal amount plus previous interest at regular intervals. Therefore, the interest on your investment will be compounded on a daily, weekly, monthly, or yearly basis depending on the terms when the loan was agreed upon, or the bank account was opened.
Compared to simple interest, compound interest leads to a growth in the cost of loan repayments or the amount of interest earned on the capital invested in bank accounts. Banks offer savings accounts with compound interest to tempt people with spare money to open accounts with them. The deposits paid into such accounts are then used to fund loans and mortgages to borrowers when borrowers are paying back loans with compound interest, which makes the lenders higher profits and also pays savers higher returns of investment.
Advantages of Compound Interest
The main benefits of compound interest are related to how much extra money it can generate when compared to the rate of growth provided by simple interest. Savers that open an account that provides compounded interest are going to earn more money than they would by opening a different type of account, which used simple interest to determine the amount of interest received. Even when banks place restrictions on the minimum amount of money that has to be deposited into such accounts and limits the number of withdrawals opening, this kind of account still offers the advantage of higher returns for those people that can afford to do it.
For lenders charging compound interest on loans gives them the advantage of receiving higher loan repayments, as the borrower has to pay higher installments. Over the course of a loan, the lender makes a much larger return with compounded interest than simple interest. Should there be increases in interest rates, then the lenders will make even more money. The only borrowers can reduce the amount of extra money they repay because of compounded interest is to repay the loan early.
Why is Compound Interest So Powerful?
There are a variety of reasons why compound interest is so compelling. For savers, the higher returns from accounts with compounded interest provide a powerful incentive to invest their capital in the institutions that offer the accounts. These types of accounts offer a more stable profit than investing in the stock market, even if they may have to wait longer to withdraw their earnings.
For lenders, compound interest is so compelling as it makes them higher returns in terms of the number of loan repayments and the length of loan arrangements. Lenders can offer loans with different lengths and interest rates that persuade borrowers to take loans with the more extended repayment periods. Borrowers can end up paying back at a lower interest rate to keep monthly repayments lower yet pay back more in total due to the interest being compounded.