Monthly Compound Interest Loan Calculator – Calculate the future value of money using our compound interest calculator. Enter the present value, additional contributions (if any), interest rate and duration in years below.
This calculation is based on widely accepted formulas for educational purposes only – it is not a recommendation on how to manage your finances, and is not an offer to lend or invest. Consult a financial professional before making any financial decisions.
- 1. Monthly Compound Interest Loan Calculator
- 2. What Is Simple Interest?
- 3. Interest Only Loan Calculator
- 4. Which Interest Rate Is Considered While Calculating Emi: Simple Interest Or Compound Interest?
- 5. Loan Emi Calculator
Monthly Compound Interest Loan Calculator
Joseph Rich has a master’s degree in finance and a bachelor’s degree in economics. He specializes in economics and investment analysis.
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Laura began her career in Finance a decade ago, providing strategic financial management consultancy. She has an MBA in Finance and a Bachelor’s degree in Economics.
Compound interest is interest calculated on the principal and accrued interest of an investment or loan. Using a tool like the compound interest calculator will provide the quickest and easiest way to calculate compound interest.
With compound interest, interest is earned on the previous interest earned and the principal balance. It differs from simple interest in that simple interest is only earned on the principal balance.
In addition, you can enter an amount for contributions. The assumption here is that this amount is added at the end of the year, so no interest will be earned in the year it is added. However, if more than one year is chosen, it will earn interest in future years.
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How often interest is compounded can have a big impact on growth over time. Compounding more often will lead to faster growth as the growth is more exponential. This compound interest calculator gives the option for continuous, daily, monthly, quarterly, semi-annual and annual compounding, which are the most common and practical time periods.
Technically, interest can be compounded at any time interval you wish, but the time intervals above are the most common.
The more often the accumulation, the more interest is paid. If you select “perpetual” from the compound dropdown in the calculator, it will generate the highest interest. Choosing “annually” will produce the lowest interest amount.
Annual compounding makes it easier to calculate interest manually as the formula is a bit simpler than other types of compounding.
What Is Simple Interest?
There are several formulas for calculating compound interest, depending on the compounding frequency and whether you will be making contributions along the way.
However, if you want to add contributions at the end of each year, you will use the following formula:
Continuously compounded interest earns the most interest of all time periods because you are always earning interest.
Let’s look at some examples: one with no contributions, one with annual contributions, and one with a continuous compounding.
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Let’s say we invest $10,000 for 3 years at an annual interest rate of 5% and interest will be compounded annually. (tip: you can also use our daily compound interest calculator). In this first example, we are not accepting any contributions.
If you compare the compound interest formulas above, you will see that the second part of the formula can be substituted without contributions for the variable
So even though we contributed $1,500 ($500 per year for 3 years), the balance increased by $1,576.25 as we earned interest for 2 years on the first contribution and for 1 year on the second contribution.
Using continuous compounding with the example above, we would get an amount equal to $11,618.34 as the calculation below shows. This is $42.09 higher than with annual compounding, and this value will increase over time.
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If you want to find the time it will take to double an investment using compound interest, you can use the Rule of 72. The Rule of 72 gives an approximation of the time to double by dividing 72 by the annual interest rate.
For example, it would take just over seven years to double an investment at an annual rate of 10% (72 / 10 = 7.2).
The Rule of 72 is only an approximation, to find the exact time to double you can use our Rule of 72 calculator.
The total value is the sum of the principal and interest. The total principal is the sum of the initial value plus any contributions. Total interest is the amount of interest earned on the investment or accrued on a loan.
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The above examples show how to calculate total value mathematically. As you can see, it is much easier to use a compound interest calculator.
You can also use our APY calculator if no contributions are made or our CAGR calculator to reverse the compound interest formula and show what the compound interest rate is if you know the final balance.
To calculate the total principal, add the initial value to the annual contribution times the number of years you have contributed. If there are no contributions, the total principal is equal to the initial value.
In our first example, the total principal was $10,000 since there were no contributions. However, the total principal in the second example was $11,500 because $1,500 in contributions were added to the initial principal of $10,000.
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Although things get a little more complicated when making contributions, here are the steps needed to calculate compound interest.
You can also calculate compound interest using our interest calculator, which allows you to calculate simple or compound interest.
Compound interest works in the sense that a loan or investment earns interest on the initial value plus the previous interest earned. This means you earn interest on past interest, leading to exponential growth for an investment.
There are two types of compound interest: periodic and continuous. Periodic compound interest is when interest is re-charged at specific times, such as daily, monthly, quarterly, annually or annually.
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Continuous compound interest is when interest is earned continuously, over the shortest possible period, resulting in the highest form of growth for an investment or loan.
Many banks offer compound interest accounts for savings accounts, certificates of deposit (CDs), and money market accounts. Each bank can vary the compounding frequency, be it daily, monthly or yearly. Bond Yield Yield to Maturity (YTM) Yield to Call (YTC) Yield to Worst (YTW) Current Yield Curve Yield
Compound interest is the incremental interest earned on the original principal (or deposit amount) and the accumulated interest from previous periods.
In finance, compound interest results from growth in the principal amount due to the accumulation of interest, which leads to the receipt of more interest (i.e. “interest on interest”).
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The accrued interest is added to the principal, which then determines the interest amount in the next period in a continuous cycle until the end of the term.
So, even with a low interest rate, compounding effects can cause the principal to grow significantly over a long period of time.
The rate at which the compounding effects on interest accumulate is a function of the frequency of compound interest periods.
The formula for calculating the future value of a financial instrument that earns interest with compounding effects is shown below:
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If we subtract the present value (PV) from the future value (FV), the effect of compound interest can be isolated.
In each compounding period, the interest accrued in the previous period is transferred to the current period and the principal amount is increased.
In contrast, the accrued interest is not added to the principal in simple interest calculations. Instead, simple interest is calculated on the original principal amount.
Here, the interest expense builds up to the final principal, rather than being paid in cash in the current period.
Which Interest Rate Is Considered While Calculating Emi: Simple Interest Or Compound Interest?
But even though the borrower can delay the payment due, a compounding effect causes the principal balance to be paid at maturity to increase in value.
If we assume that the annual interest rate (r) is 5% and the deposit is left untouched for 10 years, the future value of the original $100,000 is determined by the compound interest frequency.
The Excel “FV” function can be used to calculate how much your $100,000 deposit is worth now after 10 years.
Since the $100,000 is an outflow from your perspective (ie, an investment), it should be entered as a negative figure.
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Under each scenario, the future value (FV) of the $100,000 deposit and the percentage change compared to the original value are shown below:
For example, if the compounding frequency is monthly, your $100,000 deposit has grown to $164,701, earning a total of $64,701 in interest after 10 years.
To repeat from earlier, the more often interest is compounded, the more interest is earned, as our compound interest model confirms.
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