Interest Calculator

An interest calculator works out how much interest you will earn on savings or pay on a debt, based on the principal, interest rate, time period, and compounding frequency. It is used by savers comparing accounts, borrowers checking the cost of a loan, and anyone wanting to understand the difference between simple and compound interest in practical terms.

How to Use the Interest Calculator

1. Enter the principal: the starting balance or loan amount.
2. Enter the annual interest rate as a percentage.
3. Set the time period in years or months.
4. Choose simple or compound interest, and if compound, select the compounding frequency (annually, monthly, daily).
5. Click calculate to see the interest earned or charged and the final balance.

The Formula

Simple interest:

Interest = Principal x Rate x Time

Where Rate is the annual rate as a decimal and Time is in years. The final balance is Principal + Interest.

Compound interest:

A = P x (1 + r/n)^(n x t)

Where A is the final amount, P is the principal, r is the annual rate as a decimal, n is the number of compounding periods per year, and t is the number of years. Interest earned equals A - P.

Worked example

You deposit £5,000 for 3 years at 4% annual interest. What is the difference between simple and compound interest?

Simple interest:

• Interest = £5,000 x 0.04 x 3 = £600
• Final balance: £5,600

Compound interest (monthly compounding):

• A = £5,000 x (1 + 0.04/12)^(12 x 3)
• A = £5,000 x (1.003333)^36
• A = £5,000 x 1.12716 = £5,635.80
• Interest earned: £635.80

The difference is £35.80 over 3 years on a £5,000 balance. At higher balances or over longer periods, this gap grows substantially.

Simple Versus Compound Interest in Practice

Simple interest is used for some personal loans, car loans, and savings bonds where interest does not accrue on previously earned interest. Compound interest applies to most savings accounts, mortgages, credit cards, and investment accounts. For savings, compound interest works in your favour: interest on interest accelerates growth over time. For debt, compound interest works against you: unpaid interest gets added to the balance and generates further interest charges. This is why high-interest revolving debt (credit cards, overdrafts) can grow faster than many people expect if only minimum payments are made. When comparing financial products, always check the compounding frequency alongside the rate, as more frequent compounding increases both earnings on savings and costs on debts.

Frequently Asked Questions

What is the AER and how does it relate to interest rates? The Annual Equivalent Rate (AER) is the standardised interest rate that accounts for compounding frequency, allowing fair comparison between savings accounts. If one account compounds monthly at 3.9% and another compounds annually at 4%, the AER converts both to the same basis so you can compare directly. When comparing savings accounts in the UK, always use the AER, not the gross rate.

What is the difference between nominal and effective interest rate? The nominal rate is the stated annual rate without adjusting for compounding. The effective rate (or AER) is the actual annual return after compounding is applied. A 6% nominal rate compounded monthly has an effective rate of approximately 6.17%. The difference grows as the compounding frequency increases and as the nominal rate rises.

Does daily compounding make a significant difference to savings? On small balances over short periods, the difference between monthly and daily compounding is minimal. On a £10,000 balance at 5% over 10 years, daily compounding produces about £17 more than monthly compounding. The difference becomes more material at higher balances and longer timeframes. The AER standardises for compounding, so comparing AERs directly is the simplest approach.

How is interest calculated on a credit card? Most UK credit cards charge interest daily on the outstanding balance if you carry a balance from month to month. The daily rate is the APR divided by 365. Interest is calculated on the average daily balance during the statement period and added to the balance each month. Paying the full statement balance every month avoids all interest charges entirely.

What the AER Does That the Gross Rate Does Not

Interest paid monthly at a nominal rate is not the same as interest paid once a year at the same rate, because the monthly payments start earning interest themselves partway through the year. The Annual Equivalent Rate puts both on one footing. A nominal 3.90% compounded monthly has an AER of 3.970%, while a nominal 4.00% compounded annually has an AER of 4.000%. The first account looks as though it pays less and, in AER terms, it does.

That is the only reason to compare AERs rather than headline rates when you are choosing a savings account. Two accounts quoting 4% can pay different amounts if one compounds monthly and the other annually, and the AER settles which is which. The same idea appears under different names elsewhere: the United States uses the annual percentage yield, and the arithmetic is identical.

Compounding Frequency, Worked Through

The frequency of compounding has a real effect on a long holding and a small one on a short holding. On a 10,000 balance at 5% held for 10 years:

Daily compounding earns 181.14 more than annual compounding on the same nominal rate, and 16.56 more than monthly. The gap grows with the rate, the balance and the time held, and it shrinks to nothing over a single year. On a credit card at 20%, the same effect works against the borrower.

Where Simple Interest Is Still Used

Simple interest is charged on the principal only, so it never compounds and the total is easy to predict. It survives in a few places where that predictability is the point: interest on some car loans and personal loans quoted on a flat basis, interest on savings bonds, late payment interest on a court judgment, and interest charged between businesses on overdue invoices. In each case the arithmetic is principal multiplied by rate multiplied by time, and nothing is added to the balance until the borrower pays.

The distinction matters most when a rate is advertised. A flat rate on a car loan is not comparable with an APR, because the flat rate is charged on the original amount rather than the reducing balance, and it makes the same loan look cheaper than it is. Ask for the APR or the annual percentage rate, which is defined on a reducing balance, before comparing two offers.

Interest on Debt and the Order of Payments

On a debt account, interest is calculated on the balance for the period it was outstanding, and then payments are applied. Where a minimum payment does not cover the interest, the shortfall is added to the balance and attracts interest in the next period. That is compound interest working against you, and it is the mechanism behind a balance that grows even while the borrower keeps paying.

Two habits change the result more than the rate does. Paying more than the interest each month, so the balance falls, and clearing the balance before any promotional rate ends. On a card at an annual rate of 20%, interest of about 1.50 a month accrues on every 100 of balance, and a payment of 100 a month on a 3,000 balance therefore clears the debt in roughly three years rather than the ten that a minimum payment would take.

What This Calculator Does Not Model

The calculator assumes the rate stays the same for the whole period, that no money is added to or withdrawn from the balance, and that interest is credited at the compounding frequency you chose rather than on the day count your bank actually uses. Real accounts use a daily balance and a day-count convention, pay interest on a set date, and change the rate when the central bank changes its own. Tax on interest is also excluded, and where interest is taxable the effective return is lower than the figure shown.

Related tools

• Compound Interest Calculator - the same formula with regular deposits added
• Savings Calculator - what a monthly amount grows into
• Loan Calculator - the same arithmetic on money you owe
• APR Calculator - turn fees and interest into one comparable rate
• Rule of 72 Calculator - estimate a doubling time without a calculator

References

• Bank of England, "The interest rate Bank Rate" (the rate the Monetary Policy Committee sets, and the anchor for savings and borrowing rates in the United Kingdom). https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate. Accessed 2026-09-27.
• MoneyHelper (Money and Pensions Service), "Interest rates explained" (how rates and the AER work on savings accounts). https://www.moneyhelper.org.uk/en/savings/types-of-savings/interest-rates-explained. Accessed 2026-09-27.
• Investopedia, "Compound Interest" (the compounding formula and the effect of frequency). https://www.investopedia.com/terms/c/compoundinterest.asp. Accessed 2026-09-27.
• U.S. Securities and Exchange Commission, Investor.gov, "Compound Interest Calculator". https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator