Interest
Calculate simple and compound interest for savings and loans
lessons (2)
Simple Interest
Learn how to calculate interest earned on savings or owed on loans using the simple interest formula.
Compound Interest
Learn how compound interest grows your money faster by earning interest on interest.
Interest is the cost of borrowing money or the reward for saving it. Simple interest is calculated only on the principal amount, while compound interest is calculated on both the principal and accumulated interest. Understanding this difference is crucial: a savings account earning compound interest grows faster, but a loan with compound interest costs more than you might expect.
The power of compound interest, often called the eighth wonder of the world, shows why starting to save early matters so much. Even small amounts invested regularly can grow substantially over time. Conversely, understanding how interest works on loans helps you make informed borrowing decisions and avoid debt traps.
What Students Will Learn
- Calculate simple interest using I = Prt
- Calculate compound interest using A = P(1 + r/n)^(nt)
- Compare simple and compound interest outcomes
- Understand the effect of compounding frequency
- Apply interest calculations to real financial decisions
Frequently Asked Questions
What is the difference between simple and compound interest?
Simple interest is calculated only on the original principal. Compound interest is calculated on principal plus previously earned interest, causing exponential growth over time.
Why does compounding frequency matter?
More frequent compounding (monthly vs. yearly) means interest earns interest sooner, resulting in faster growth. Daily compounding earns slightly more than monthly for the same rate.
What does APR vs APY mean?
APR (Annual Percentage Rate) is the simple interest rate. APY (Annual Percentage Yield) includes compounding effects and shows the actual yearly return or cost.