P Principal amount r Annual interest rate t Number of years interest is applied beginaligned textCompound Interest P times left. A P 1 r n n t A 1 000 000 1 06 12 12 5 A 1 000 000 1 0005 12 5 A 1 000 000 1005 60 A 1 348 85015. So the initial amount of the loan is then subtracted from the resulting value.
For a borrower simple interest is advantageous since the total interest expense will be less without the effect of compounding.
Compound interest or interest on interest is calculated with the compound interest formula. 1000000 at a rate of 3875 per year. Simple interest is generally applied for the short term. The compound interest formula is P1in - P where P is the principal i is the annual interest rate and n is the number of periods.