Loan Compound Interest Calculator
Compound interest works against you when you borrow money. Unlike savings where compounding grows your wealth, loan compound interest increases the total cost you pay over the life of a loan. Use this calculator to see how interest accumulates on mortgages, credit cards, student loans, and other debt.
- Compound interest works against borrowers — you pay interest on previously accrued interest, increasing your total repayment cost
- Credit cards compound daily at 18-30% APR — a $5,000 balance at 24% APR grows to over $8,000 in just 3 years if you only make minimum payments
- Extra payments dramatically reduce total interest — paying just $100 extra per month on a mortgage can save tens of thousands in interest
- Simple vs. compound interest on loans — most mortgages use simple interest on the remaining balance, while credit cards use compound interest on unpaid amounts
| Year | Principal | Interest | Balance |
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| Year | Initial | Contributions | Interest | Balance |
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CAGR = (Ending Value / Starting Value)^(1/Years) - 1A = P × e^(r × t)Where e ≈ 2.71828 (Euler's number)
How Loan Interest Compounds Against You
When you borrow money, compound interest works in the lender's favor and against you as the borrower. Instead of earning interest on your growing balance, you owe interest on your outstanding debt—and when that interest goes unpaid, it gets added to the principal, meaning you start paying interest on interest.
This is why minimum payments on credit cards are so dangerous. A small portion of your payment goes toward the actual balance while interest continues to accumulate. On a $10,000 credit card balance at 24% APR compounded daily, you would accrue approximately $6.58 in interest every single day. If your minimum payment barely covers the interest, the principal hardly shrinks and you remain in debt for decades.
Understanding how compound interest works on loans is the first step toward minimizing what you pay. The key variables are the interest rate, the compounding frequency, and how quickly you pay down the principal. The Consumer Financial Protection Bureau (CFPB) provides tools and resources to help consumers understand how credit card interest accumulates.
Mortgage Compound Interest Explained
Mortgages are somewhat unique among loans because most use simple interest calculated on the remaining balance rather than true compound interest. Each monthly payment covers the interest accrued since the last payment, with the remainder reducing the principal. However, the effect still resembles compounding because early payments are mostly interest.
Here is how a typical 30-year mortgage amortizes at different interest rates on a $300,000 loan:
| Interest Rate | Monthly Payment | Total Interest Paid | Total Cost |
|---|---|---|---|
| 5.0% | $1,610 | $279,767 | $579,767 |
| 6.0% | $1,799 | $347,515 | $647,515 |
| 7.0% | $1,996 | $418,527 | $718,527 |
| 8.0% | $2,201 | $492,467 | $792,467 |
At 7%, you pay more in interest ($418,527) than the original loan amount ($300,000). This illustrates why even a 1% difference in mortgage rate can cost or save you tens of thousands of dollars over the life of the loan. According to the CFPB's homeownership resources, comparing mortgage rates from multiple lenders can save borrowers thousands of dollars over the life of the loan.
Credit Card Compound Interest: The Hidden Danger
Credit cards are the most expensive form of compound interest debt for most consumers. Unlike mortgages, credit cards compound interest daily on your average daily balance, and typical APRs range from 18% to 30%. This daily compounding means interest accrues on interest every single day.
Consider a $5,000 credit card balance at 24% APR compounded daily. If you only make minimum payments (typically 2% of the balance or $25, whichever is greater):
- It would take over 27 years to pay off the balance
- You would pay approximately $8,700 in interest—nearly double the original balance
- Your total repayment would exceed $13,700 on a $5,000 purchase
By contrast, paying $200 per month on that same $5,000 balance would eliminate the debt in about 2.5 years and cost roughly $1,500 in interest—saving you over $7,000 compared to minimum payments.
Student Loan Compounding
Federal student loans use simple daily interest, but interest can capitalize (be added to the principal) under certain circumstances, creating a compounding effect. Capitalization typically occurs when:
- Your grace period ends after graduation
- You exit a deferment or forbearance period
- You switch repayment plans
- You fail to recertify income-driven repayment
For example, if you borrow $35,000 in student loans at 5.5% interest and defer payments for 2 years after graduation, approximately $3,850 in accrued interest capitalizes and is added to your balance. You now owe $38,850, and all future interest is calculated on this higher amount. Over a 10-year repayment period, this capitalization costs you an additional $1,200 in total interest compared to paying interest during the grace period.
Private student loans may compound interest monthly or even daily, making them potentially more expensive than federal loans at the same interest rate. The Federal Student Aid website provides detailed information on repayment plans and strategies to manage interest capitalization.
Loan Amortization: How Payments Are Applied
Understanding how your loan payments are split between principal and interest is key to minimizing total interest costs. In a fully amortized loan (like most mortgages and auto loans), each payment covers the accrued interest first, with the remainder reducing the principal.
| Payment # | Payment | To Interest | To Principal | Remaining Balance |
|---|---|---|---|---|
| 1 | $1,996 | $1,750 | $246 | $299,754 |
| 12 | $1,996 | $1,732 | $264 | $296,729 |
| 60 | $1,996 | $1,626 | $370 | $277,817 |
| 120 | $1,996 | $1,445 | $551 | $246,017 |
| 240 | $1,996 | $858 | $1,138 | $145,184 |
| 360 | $1,996 | $12 | $1,984 | $0 |
Based on a $300,000 mortgage at 7% for 30 years. In the first payment, 87.7% goes to interest and only 12.3% reduces the principal. By the final payment, almost the entire amount goes to principal. This front-loaded interest structure is why extra payments in the early years of a loan are so effective — each extra dollar directly reduces the balance that future interest is calculated on.
When to Consider Refinancing
Refinancing replaces your existing loan with a new one, ideally at a lower interest rate. The CFPB's refinancing guide recommends considering refinancing when:
- Rate reduction of 0.75-1.0% or more: A meaningful rate decrease justifies the closing costs. Calculate your break-even point by dividing closing costs by monthly savings.
- Shortening the loan term: Refinancing from a 30-year to a 15-year mortgage often reduces the total interest paid by 50% or more, even though monthly payments increase.
- Eliminating private mortgage insurance (PMI): If your home has appreciated and you now have 20%+ equity, refinancing can remove PMI charges.
- Switching from adjustable to fixed rate: If rates are rising, locking in a fixed rate protects against future payment increases.
| Refinance Scenario | Original Rate | New Rate | Monthly Savings | Total Interest Saved |
|---|---|---|---|---|
| $300K mortgage, 25 years left | 7.5% | 6.0% | $298 | $64,400 |
| $300K mortgage, 30yr to 15yr | 7.0% | 6.0% | -$537 (higher) | $219,300 |
| $25K auto loan, 4 years left | 8.0% | 5.5% | $27 | $1,296 |
| $50K student loan, 8 years left | 6.5% | 4.5% | $55 | $5,280 |
Always factor in closing costs (typically 2-5% for mortgages, lower for other loans) when evaluating refinancing. The break-even point is the number of months it takes for your monthly savings to recoup the closing costs.
Strategies to Reduce Compound Interest on Debt
There are several proven methods to minimize the total interest you pay on loans:
- Make extra payments toward principal: Even an additional $50-100 per month dramatically reduces total interest. On a $300,000 mortgage at 7%, paying $100 extra per month saves over $75,000 in interest and shortens the loan by 5 years.
- Refinance to a lower rate: Reducing your interest rate by even 1% can save thousands. A $25,000 auto loan refinanced from 8% to 5% over 5 years saves approximately $2,100 in interest.
- Use the debt avalanche method: Pay minimums on all debts, then put every extra dollar toward the highest-interest debt first. This mathematically minimizes total interest paid across all your loans.
- Pay more frequently: Making biweekly mortgage payments instead of monthly results in 26 half-payments (13 full payments) per year instead of 12, paying off a 30-year mortgage roughly 4 years early.
- Avoid interest capitalization: On student loans, pay at least the accruing interest during deferment and grace periods to prevent your balance from growing.
The most impactful strategy depends on your specific situation, but the common theme is clear: reducing the principal balance faster means less interest accrues, which means you pay less overall.
Frequently Asked Questions
No. Most mortgages and auto loans use simple interest calculated on the remaining balance. Credit cards use compound interest, typically compounding daily. Federal student loans use simple daily interest, but unpaid interest can capitalize (be added to the principal), creating a compounding effect. Personal loans vary by lender.
Credit card companies divide your APR by 365 to get a daily periodic rate. For example, a 24% APR has a daily rate of 0.0657%. Each day, this rate is applied to your average daily balance, including previously accrued interest. This daily compounding means you pay interest on interest every day you carry a balance past the grace period.
Extra payments can save a substantial amount. On a $300,000 mortgage at 7% for 30 years, paying just $200 extra per month saves approximately $130,000 in total interest and pays off the loan about 9 years early. Even one extra payment per year (achieved through biweekly payments) can save tens of thousands and shorten the loan by 4-5 years.
APR (Annual Percentage Rate) is the stated annual interest rate without accounting for compounding. APY (Annual Percentage Yield) includes the effect of compounding. For loans, a 24% APR compounded daily results in an effective APY of about 27.1%. Lenders are required to disclose APR, but the APY reflects what you actually pay when interest compounds.
As a general rule, pay off debt with interest rates above 7-8% before investing, since stock market returns historically average around 7-10%. Always contribute enough to get an employer 401(k) match first (that is a guaranteed 50-100% return). High-interest credit card debt (18-30%) should almost always be paid off before investing, as no investment reliably beats those rates.
Refinancing replaces your existing loan with a new one at a lower interest rate. Since interest accrues as a percentage of your remaining balance, a lower rate means less interest accrues each period. For example, refinancing a $200,000 mortgage from 7.5% to 6% saves roughly $230 per month and over $80,000 in total interest over 30 years. However, factor in closing costs (typically 2-5% of the loan) to ensure refinancing makes financial sense.
Both are debt repayment strategies. The debt avalanche method prioritizes paying off the highest-interest debt first (while making minimums on everything else), which minimizes total interest paid. The debt snowball method prioritizes the smallest balance first, providing psychological wins that keep you motivated. Mathematically, the avalanche method saves more money, but the snowball method has higher completion rates in practice. The CFPB provides tools to help you develop a debt repayment plan.
Most auto loans use simple interest calculated on the remaining balance, not compound interest. Each monthly payment covers the interest accrued since the last payment, with the rest reducing the principal. However, if you miss payments or make late payments, unpaid interest can be added to the balance, creating a compounding effect. Making payments on time and adding extra payments toward principal are the most effective ways to reduce total interest on an auto loan.