FREE INTRODUCTORY READING · GENERAL EDUCATION
Interest is a price for time
Simple interest uses the original principal: interest = principal × annual rate × years. At a simple annual rate of 5%, $1,000 earns $50 in one year, before any fees or taxes.
Compounding changes the base
Compound interest applies to principal plus accumulated interest. With the same nominal annual rate, the compounding frequency changes the result. The money lab lets you compare annual, monthly and daily compounding. Its daily example assumes 365 periods a year; an actual agreement may use different conventions.
A payment has more than one job
In a standard fixed-rate amortizing loan, each scheduled payment covers interest and reduces principal. Interest is calculated on the outstanding balance, so the mix changes as the balance declines. The calculator shows that shift for a simplified loan.
APR, interest rate and APY answer different questions
A quoted interest rate alone does not describe every cost or yield. APR and APY have specific disclosure rules and are not interchangeable. Read the fees, payment schedule and product terms before comparing offers.