Interest Calculator

What this calculator tells you

Interest is the charge for borrowing money or the reward for lending or saving it. This calculator works out the interest earned or charged on a balance over a period, with any compounding frequency you choose, and shows the total at the end of the term.

It covers both savings and borrowing, because the mathematics is the same: a rate is applied to a balance, and the interest is either added or owed. The compounding frequency sets how often that interest is added to the balance, which in turn affects how much is earned or owed in total.

How the result is worked out

The balance at the end of the term equals the principal multiplied by one plus the annual rate divided by the number of compounding periods per year, raised to the total number of periods. The interest is the final balance minus the principal. Monthly compounding divides the annual rate by twelve and applies that rate twelve times a year, while daily compounding uses 365 periods.

A worked example

Suppose you hold 1,000 at 5% a year, compounded monthly, for one year. The monthly rate is 5% divided by twelve, about 0.4167%. After twelve periods, the balance is about 1,051.16, so the interest is about 51.16. Compounded annually at the same rate, the interest would be exactly 50, showing how more frequent compounding adds a little extra.

Compounding frequency and the effective rate

The stated rate is not the same as the effective yearly rate once compounding is included. The effective annual rate is the growth in one year, and it rises with the frequency. The annual percentage yield is the effective rate expressed as a percentage, and it is the right figure to compare when two offers use different compounding schedules.

For borrowing, the effect works in the opposite direction. More frequent compounding increases the amount owed for the same stated rate, so check the frequency and the effective annual rate on any loan you are considering.

Assumptions and limits

The calculator assumes a fixed rate and no deposits or repayments during the term. Interest rates on savings and loans often change, and many loans involve fees or repayments that change the balance. Tax on interest earned, and any penalty for early withdrawal or early repayment, are excluded.

Checking an interest statement

Interest statements can show the interest for a period in several ways, such as accrued interest, interest credited or interest charged. Check which figure you are looking at and the dates it covers. Comparing the statement with a calculation for the same period helps catch errors, such as the wrong rate or a missed deposit.

When interest is charged on a loan, check whether the lender uses a day count convention, because it can change the amount slightly. Ask the lender to explain the method if the figure differs from your own calculation.

Using the result

Use the calculator to compare the outcome of different rates and compounding schedules, and to see the total interest on a loan or the total return on a deposit. For savings, the annual percentage yield is the best comparison; for loans, check the total amount repayable and any fees alongside the stated rate.

Choosing the right period to compare

When comparing interest on two products, make sure both are measured over the same period. An offer quoted as a monthly rate and another quoted as an annual rate are not directly comparable until both are converted to an annual effective rate. Check the compounding frequency and whether the interest is paid out or added to the balance, because both affect the total you receive or owe.