Interest and Percentage Calculations
Interest calculation is a direct application of percentage mathematics. Interest is the price for borrowed or invested money, expressed as a percentage of the capital per time period (usually per year).
Simple Interest
With simple interest, interest is calculated only on the initial capital, not on previously accumulated interest.
Interest = Capital x Interest Rate / 100 x Duration (in years)
Example: EUR 10,000 at 3.5% for 1 year: 10,000 x 3.5 / 100 = EUR 350 interest. After 3 years: 10,000 x 3.5 / 100 x 3 = EUR 1,050.
Compound Interest -- The Power of Exponential Growth
With compound interest, interest is added to the capital at the end of each period and earns interest in subsequent periods.
Final Capital = Initial Capital x (1 + Interest Rate / 100) ^ Duration
Example: EUR 10,000 at 3.5% for 20 years: 10,000 x 1.035^20 = EUR 19,898. The interest amounts to EUR 9,898 -- almost as much as the initial capital.
For comparison: With simple interest, it would only be 10,000 + (10,000 x 0.035 x 20) = EUR 17,000.
The Rule of 72
A rule of thumb: Divide 72 by the interest rate to estimate in how many years your capital will double.
At 3% interest: 72 / 3 = 24 years to double. At 6%: 72 / 6 = 12 years. At 8%: 72 / 8 = 9 years.
Interest and Inflation
The real interest rate results from the nominal interest rate minus the inflation rate. If your savings account yields 2% but inflation is 3%, you lose 1% purchasing power per year in real terms.
Real Interest Rate approx. = Nominal Interest - Inflation Rate
More precisely: Real rate = ((1 + Nominal) / (1 + Inflation) - 1) x 100.
Effective Annual Rate vs. Nominal Rate
The effective annual rate accounts for compound interest effects within a year. With monthly compounding of 12% nominal:
Effective = (1 + 0.12 / 12)^12 - 1 = (1.01)^12 - 1 = 12.68%.
That's why the effective annual rate on loans is always slightly higher than the nominal rate -- and this is exactly what must be disclosed in credit offers according to EU law.
Use our percentage calculator to quickly verify the underlying percentage calculations in interest computations.