Compound Interest Formula - Effects of Borrowing One Million over 10 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 1,000,000.00 at 5% interest per year after 10 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:
- P is the principal amount or loan amount, 1,000,000.00.
- r is the interest rate, 5% per year, which in decimal form is, 5/100=0.05
- t is the term involved, 10 year(s) time periods.
- So, t is 10 year time periods.
To find the compounded interest, we multiply 1,000,000.00 x ( 0.05 + 1 ) 10 - 1,000,000.00 which results in the following:
The compound interest payable is: 628,894.63 (Six Hundred and Twenty-Eight)
Usually now, the interest is added onto the principal to figure some new amount after 10 year(s), or 1,000,000.00 + 628,894.63 = 1,628,894.63. For example:
- If you borrowed the sum of 1,000,000.00, you would owe 1,628,894.63 in 10 years time.
- If you loaned someone 1,000,000.00, you would be due 1,628,894.63 in 10 years time.
- If owned something, like a 1,000,000.00 bond, it would be worth 1,628,894.63 in 10 years time.
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.