When borrowing or investing money, you will typically encounter either Simple Interest or Compound Interest. It is critical to understand the difference.
Simple Interest is calculated solely on the principal amount (the original amount of money). The interest amount remains exactly the same every single year. For example, if you invest 10,000 at 5% simple interest, you will earn exactly 500 in interest in year 1, 500 in year 2, 500 in year 3, and so on.
Compound Interest, on the other hand, is "interest on interest." It is calculated on the initial principal AND the accumulated interest from previous periods. Using the same example, you would earn 500 in year 1. But in year 2, you earn 5% on 10,500 (yielding 525). Over long periods of time, compound interest grows exponentially faster than simple interest.
This calculator is specifically designed for Simple Interest calculations, which are often used for personal loans, auto loans, and short-term certificates of deposit.