Compound Interest Formula - Effects of Borrowing One Thousand over 5 Years

What is Compound Interest?

Compound interest differs from simple interest in that at the end of each period (monthly, daily, yearly etc) the interest is added to the principal amount. It's what you'd expect to happen if you invested some savings with the bank. After the first year of investment, assuming you made no withdrawls, you would have the original amount you deposited with them plus any interest earned during the year. For the following years interest, the bank would base the interest payable on your new balance - not the original amount you invested. Compounding your interest yearly. Better for you when investing, not so good when borrowing :(

How to calculate compound interest

To calculate the interest on 1,000.00 at 5% interest per year after 5 year(s) we need to apply a compounding formula or compound interest equation.

The formula we'll use for this is the compound interest formula is as follows:

Where:

P is the principal amount or loan amount, 1,000.00.
r is the interest rate, 5% per year, which in decimal form is, 5/100=0.05
t is the term involved, 5 year(s) time periods.
So, t is 5 year time periods.

To find the compounded interest, we multiply 1,000.00 x ( 0.05 + 1 ) 5 - 1,000.00 which results in the following:

The compound interest payable is: 276.28 (Two Hundred and Seventy-Six)

Usually now, the interest is added onto the principal to figure some new amount after 5 year(s), or 1,000.00 + 276.28 = 1,276.28. For example:

If you borrowed the sum of 1,000.00, you would owe 1,276.28 in 5 years time.
If you loaned someone 1,000.00, you would be due 1,276.28 in 5 years time.
If owned something, like a 1,000.00 bond, it would be worth 1,276.28 in 5 years time.

What would be the interest charged be if I doubled up?

For a simple illustration of how the intestest would change if you were to simple double up the amount borrowed,i.e., Two Thousand over Five Years, click the following link... double the capital

What would be the interest charged be if I halved the loan amount?

For a simple illustration of how the intestest would change if you were to simple halve the amount borrowed,i.e., Five Hundred over Five Years, click the following link... Halve the loan amount

What would happen if I extended the term?

For a simple illustration of how the intestest would change if you were to simple double the length of time to repay the debt click the following... Double the term of the loan

What would happen if I reduced the term?

For a simple illustration of how the intestest would change if you were to simple reduce the length of time to repay the debt click the following... Halve the term of the loan

Return to the homepage for help on how to calculate interest.

Disclaimer: The formulaes/calculators above should be used for guidance only. Please refer to the financial institution you are dealing with for exact methods of computation. Some institutions might implement other variations of the methods described.