In the case of any deposit made in the form of investment and interest applies on it on periodic basis, then the interest is added to the investment periodically. After that, the interest is applied on new amount which comes out after adding the previous interest to the investment. This interest, which applies on investment as well as the interest applied on the investment is called compound interest.
The compound interest helps the investment grow at a faster rate as compared to simple interest, as unlike simple interest the interest is applied on both, interest and principal, and not only on principal.
To calculate compound interest, following formula is used:
A = P (1 + r/n) ^nt
Where, A = amount after given time; P = principal amount (initial investment); r = annual interest rate (as a decimal); n = number of times the interest is compounded in a year; t = number of years.
Yes, the online interest calculators generally ask you to enter the amount, rate of interest, time period, etc, manually so that you can get dynamic results as per needs.
No, online compound interest calculators are generally free.
Here I: interest, P: Principal, R: Rate, T: Time and A: Amount:
Simple interest rate formula is, I= P*R*T/100; hence A = P + I
Compound interest rate formula is A = P (1 + r/n) ^ nt
A: When anybody is asked for a choice between the simple and the compound interest, everyone chooses compound interest. This is due to the reason that in compound interest, the investment grows much faster than the simple interest as the interest is paid on both investment as well as previous interest.
Let's take an example:
Assume an investment of ten lakh is to be made with an option of simple and compound interest, given the rate of interest is 20% annually for a period of 3 years.
The simple interest earned will be I= P*R*T/100
That is, I = 10, 00,000*20*3/100 = 6, 00,000
And in case of compound interest, amount is P (1 + r/n) ^ nt
That is, A=10, 00,000(1+0.2) ^3 = 10, 00,000(1.728) = 17, 28,000
Hence, I = A-P i.e. 17, 28,000-10, 00,000 = 7, 28,000
Clearly, there is a great difference in amount between the two. Hence, compound interest proves to be a good option for investment as it gives more interest than simple interest.