How to Calculate Simple Interest vs. Amortized

When calculating interest, you can use one of two methods: simple interest or amortizing interest, also know as compound interest. With simple interest, the equation assumes that the interest does not get added to the account until the very end. With amortized interest, the interest accruing on the account increases the balance of the account periodically, which results in a larger amount of interest by the end. Though amortizing interest is more complicated to calculate, it is more accurate than the simple interest formula.

Simple Interest

Step 1

Convert the percentage interest rate to a decimal interest rate by dividing by 100. For example, if the annual interest rate equals 4.4 percent, divide 4.4 by 100 to get 0.044.

Step 2

Multiply the decimal interest rate by the time the interest accrues. For example, if the money remains in the account for 1.5 years, multiply 1.5 by 0.044 to get 0.066.

Step 3

Multiply the result by the starting balance. In this example, if you start with $19,000, multiply $19,000 by 0.066 to get $1,254 of interest.

Amortizing Interest

Step 1

Convert the percentage interest rate to a decimal interest rate by dividing by 100. For example, if the annual interest rate equals 4.4 percent, divide 4.4 by 100 to get 0.044.

Step 2

Calculate the periodic interest rate by dividing the result by the periods per year. For example, if the interest amortized quarterly, divide 0.044 by 4 to get 0.011.

Step 3

Add 1 to the periodic rate. Here, add 1 to 0.011 to get 1.011.

Step 4

Raise the sum of 1 plus the periodic rate to the number of periods over which interest compounds. In this example, since 1.5 years equals 6 quarters, raise 1.011 to the 6th power to get 1.067841841.

Step 5

Subtract 1 from the result. Here, subtract 1 from 1.067841841 to get 0.067841841.

Step 6

Multiply the result by the initial amount to find the amortized interest. Completing the example, multiply 0.067841841 by $19,000 to get $1,288.99.

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