Simple Interest Calculator
What is Interest?
Interest, in finance and economics, is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct from a fee which the borrower may pay the lender or some third party. It is also distinct from dividend which is paid by a company to its shareholders (owners) from its profit or reserve, but not at a particular rate decided beforehand, rather on a pro rata basis as a share in the reward gained by risk taking entrepreneurs when the revenue earned exceeds the total costs.
In the calculator above, you are only allowed to specify the time in months in case the time covered isn't up to a year.
For example, a customer would usually pay interest to borrow from a bank, so they pay the bank an amount which is more than the amount they borrowed; or a customer may earn interest on their savings, and so they may withdraw more than they originally deposited. In the case of savings, the customer is the lender, and the bank plays the role of the borrower.
The rate of interest is equal to the interest amount paid or received over a particular period divided by the principal sum borrowed or lent (usually expressed as a percentage).
Interest differs from profit, in that interest is received by a lender, whereas profit is received by the owner of an asset, investment or enterprise. (Interest may be part or the whole of the profit on an investment, but the two concepts are distinct from each other from an accounting perspective.)
In economics, the rate of interest is the price of credit, and it plays the role of the cost of capital. In a free market economy, interest rates are subject to the law of supply and demand of the money supply, and one explanation of the tendency of interest rates to be generally greater than zero is the scarcity of loanable funds.
On the question of why interest rates are normally greater than zero, in 1770, French economist Anne-Robert-Jacques Turgot, Baron de Laune proposed the theory of fructification. By applying an opportunity cost argument, comparing the loan rate with the rate of return on agricultural land, and a mathematical argument, applying the formula for the value of a perpetuity to a plantation, he argued that the land value would rise without limit, as the interest rate approached zero. For the land value to remain positive and finite keeps the interest rate above zero.
Over centuries, various schools of thought have developed explanations of interest and interest rates. The School of Salamanca justified paying interest in terms of the benefit to the borrower, and interest received by the lender in terms of a premium for the risk of default. In the sixteenth century, Martín de Azpilcueta applied a time preference argument: it is preferable to receive a given good now rather than in the future. Accordingly, interest is compensation for the time the lender forgoes the benefit of spending the money.
Adam Smith, Carl Menger, and Frédéric Bastiat also propounded theories of interest rates. In the late 19th century, Swedish economist Knut Wicksell in his 1898 Interest and Prices elaborated a comprehensive theory of economic crises based upon a distinction between natural and nominal interest rates. In the 1930s, Wicksell's approach was refined by Bertil Ohlin and Dennis Robertson and became known as the loanable funds theory. Other notable interest rate theories of the period are those of Irving Fisher and John Maynard Keynes.
There is always the risk the borrower will become bankrupt, abscond or otherwise default on the loan. The risk premium attempts to measure the integrity of the borrower, the risk of his enterprise succeeding and the security of any collateral pledged. For example, loans to developing countries have higher risk premiums than those to the US government due to the difference in creditworthiness. An operating line of credit to a business will have a higher rate than a mortgage loan.
Default interest is the rate of interest that a borrower must pay after material breach of a loan covenant.
The creditworthiness of businesses is measured by bond rating services and individual's credit scores by credit bureaus. The risks of an individual debt may have a large standard deviation of possibilities. The lender may want to cover his maximum risk, but lenders with portfolios of debt can lower the risk premium to cover just the most probable outcome.lt Interest
The default interest is usually much higher than the original interest rate since it is reflecting the aggravation in the financial risk of the borrower. Default interest compensates the lender for the added risk.
From the borrower's perspective, this means failure to make their regular payment for one or two payment periods or failure to pay taxes or insurance premiums for the loan collateral will lead to substantially higher interest for the entire remaining term of the loan.
Banks tend to add default interest to the loan agreements in order to separate between different scenarios.
In some jurisdictions, default interest clauses are unenforceable as against public policy.