Interest Rate Calculator
Calculate simple interest, compound interest, and compare APR vs APY to maximize your savings and minimize borrowing costs
💰 Calculate Your Interest
Initial amount ($)
Rate per year (%)
Years
📐 Interest Calculation Formulas
Simple Interest Formula
Formula Components:
- • SI = Simple Interest amount
- • P = Principal amount (initial investment or loan)
- • r = Annual interest rate (as a percentage)
- • t = Time period in years
Total Amount = P + SI
Compound Interest Formula
Formula Components:
- • A = Final amount (principal + interest)
- • P = Principal amount
- • r = Annual interest rate (as decimal: 5% = 0.05)
- • n = Number of times interest compounds per year
- • t = Time period in years
Compound Interest = A - P
APY (Annual Percentage Yield)
Effective annual rate considering compounding frequency
Example Calculation
Investment Scenario:
• Principal: $10,000
• Interest Rate: 5% per year
• Time: 5 years
• Compounding: Monthly (n=12)
A = $10,000 × (1 + 0.05/12)60 = $12,833.59
Total Interest Earned: $2,833.59
🔍 Simple vs Compound Interest
💡 Key Insight:
With compound interest, $10,000 at 5% for 20 years grows to $26,533 vs $20,000 with simple interest—a $6,533 difference from the power of compounding!
What is an Interest Rate?
An interest rate is the percentage charged on borrowed money or earned on invested funds over a specific period, typically expressed as an annual percentage—it represents the cost of borrowing for loans or the reward for saving and investing, fundamentally reflecting the time value of money principle that a dollar today is worth more than a dollar tomorrow.
Interest rates are determined by multiple factors including central bank policy, inflation expectations, supply and demand for credit, and perceived risk—when you deposit money in a savings account, the bank pays you interest for the privilege of using your funds to make loans to others, while when you borrow money through a loan or credit card, you pay interest as compensation for the immediate access to capital.
Understanding interest rates is crucial for financial literacy because they affect virtually every economic decision—from choosing between savings accounts with different Annual Percentage Yields (APY) to comparing mortgage rates where a 1% difference on a $300,000 loan can mean $60,000+ in additional interest over 30 years, making interest rate awareness essential for wealth building and debt management.
📊 APR vs APY: Critical Differences
APR (Annual Percentage Rate)
Used for: Loans, credit cards, mortgages
APR represents the annual cost of borrowing including fees and charges but does NOT include compounding effects—a 5% APR credit card charging monthly means you actually pay more than 5% annually due to compound interest, making APR understate true borrowing costs.
APY (Annual Percentage Yield)
Used for: Savings accounts, CDs, investments
APY represents the effective annual return including compound interest—a savings account with 5% APR compounded monthly actually yields 5.12% APY because interest earned during the year also earns interest, making APY the true measure of earning potential always higher than stated APR.
Real-World Example
Comparing Two Savings Accounts:
• Bank A: 5.00% APR compounded annually = 5.00% APY
• Bank B: 4.90% APR compounded daily = 5.02% APY
Bank B is actually better despite lower APR! On $10,000 over 1 year:
Bank A earns: $500 | Bank B earns: $502
🔧 Fixed vs Variable Interest Rates
Fixed Interest Rates
Definition: Remains constant throughout the loan or investment term
Advantages: Predictable payments, budget certainty, protection from rate increases, easier financial planning—ideal when rates are low or expected to rise
Disadvantages: Miss opportunities if rates fall, typically higher initial rate than variable, early termination penalties may apply, less flexibility to refinance without costs
Variable Interest Rates
Definition: Fluctuates based on benchmark rates (prime rate, LIBOR, etc.)
Advantages: Lower initial rate, benefits from rate decreases, more flexibility, can convert to fixed rate—ideal when rates are high or expected to fall
Disadvantages: Payment uncertainty, budgeting challenges, potential for significant rate increases, financial stress if rates spike unexpectedly—2022-2023 saw variable rates jump 4-5% rapidly
📈 Key Factors Affecting Interest Rates
🏦 Central Bank Policy
Federal Reserve (or equivalent) sets benchmark rates affecting all lending—raising rates combats inflation, lowering stimulates economy. Fed rate changes ripple through mortgages, savings, and credit cards.
💹 Inflation
Higher inflation erodes purchasing power, forcing lenders to charge more—if inflation is 3%, a 2% rate means real loss. Rates typically exceed inflation by 2-3% "real rate".
📊 Credit Score
Higher credit scores (750+) secure lowest rates—difference between 620 and 780 credit score can be 2-3% on mortgages, meaning $100,000+ over loan lifetime on $400k home.
⚖️ Supply & Demand
High credit demand pushes rates up; economic slowdowns lower rates as fewer borrow. Strong economy = higher rates, recession = lower rates to encourage borrowing.
⏰ Loan Term
Longer terms carry higher rates due to increased risk—30-year mortgages have 0.5-1% higher rates than 15-year, though monthly payments lower, total interest can double.
🎯 Loan Type
Secured loans (mortgages, auto) have lower rates than unsecured (credit cards, personal loans)—collateral reduces lender risk. Credit cards often 15-25% while mortgages 3-7%.
⚠️ Important Financial Considerations
⏰ Time is Money - Start Early:
Compound interest makes early investing incredibly powerful—$1,000 monthly from age 25-35 (10 years, $120k invested) at 8% grows to $1.2M by 65, while starting at 35 requires $1,000 monthly for 30 years ($360k invested) to reach same amount. Starting 10 years earlier requires investing 1/3 the money for same outcome!
💳 Credit Card Interest is Wealth Destroyer:
At 20% APR (typical credit card), carrying $5,000 balance costs $1,000 annually in interest—paying minimums ($150/month) takes 4+ years and costs $2,000+ in interest. Always pay credit cards in full monthly, or prioritize high-interest debt elimination before investing.
🏠 Mortgage Rate Impact is Massive:
On a $400,000 30-year mortgage, 1% rate difference (6% vs 7%) means $287/month or $103,000+ over loan life—worth spending time improving credit score (can lower rate 0.5-1%), shopping multiple lenders (rates vary 0.25-0.5%), and considering points (paying upfront to reduce rate).
📊 Inflation Must Be Considered:
A 3% savings account with 4% inflation means losing 1% purchasing power annually ("real return")—$10,000 growing at 3% for 10 years becomes $13,439 nominally but worth only $9,055 in today's dollars at 4% inflation. Always compare interest rates to inflation for true returns.
About the Author
Adam
Co-Founder @RevisionTown
Math Expert specializing in diverse international curricula including IB (International Baccalaureate), AP (Advanced Placement), GCSE, IGCSE, and various other educational programs worldwide.
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