Monthly Compound Interest

What is the Monthly Compound Interest?

Monthly compound interest refers to the compounding of interest on a monthly basis, which implies that the compounding interest is charged both on the principal as well as the accumulated interest. Monthly compounding is calculated by principal amount multiplied by one plus rate of interest divided by a number of periods whole raise to the power of the number of periods and that whole is subtracted from the principal amount which gives the interest amount.

Monthly Compound Interest Formula

The equation for calculating it is represented as follows,

A= (P (1+r/n)nt) – P
Monthly-Compound-Interest-Formula

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For eg:
Source: Monthly Compound Interest (wallstreetmojo.com)

Where

  • A= Monthly compound rate
  • P= Principal amount
  • R= Rate of interest
  • N= Time period

Generally, when someone deposits money in the bank, the bank pays interest to the investor in the form of quarterly interest. But when someone lends money from the banks, the banks charge the interest from the person who has taken the loan in the form of monthly compounding interest. The higher the frequency, the more the interest charged or paid on the principal. For example, the interest amount for monthly compounding will be higher than the amount for quarterly compoundingQuarterly CompoundingThe compounding quarterly formula depicts the total interest an investor can earn on investment or financial product if the interest is payable quarterly and reinvested in the scheme. It considers the principal amount, quarterly compounded rate of interest and the number of periods for computation.read more. This is the business model of a bank in a broader way where they make money in the differential of the interest paid for the deposits, and the interest receives for the loan disbursed.

Examples

You can download this Monthly Compound Interest Formula Excel Template here – Monthly Compound Interest Formula Excel Template

Example #1

A sum of $4000 is borrowed from the bank where the interest rate is 8%, and the amount is borrowed for a period of 2 years. Let us find out how much will be monthly compounded interest charged by the bank on loan provided.

Below is the given data for the calculation

Example 1

The Interest can be calculated as,

Monthly Compound Interest Formula Example 1.1jpg

= ($4000(1+.08/12)^(12*2))-$4000

Monthly Compound Interest Example 1.2jpg

Example #2

 A sum of $35000 is borrowed from the bank as a car loan where the interest rate is 7% per annum, and the amount is borrowed for a period of 5 years. Let us find out how much will be monthly compounded interest charged by the bank on loan provided.

Below is the given data for the calculation

Monthly Compound Interest Formula Example 2
example 2

= ($35000(1+.07/12)^(12*5))-$35000

example 2= $14,616.88

Example #3

A sum of $1 00,000 is borrowed from the bank as a home loan where the interest rate is 5% per annum, and the amount is borrowed for a period of 15 years. Let us find out how much will be monthly compounded interest charged by the bank on loan provided.

Below is the given data for the calculation

Example 3
Example 3.1jpg

= ($60000(1+.05/12)^(12*8))-$600000

example 3

= $29435

So the monthly interest will be $ 29,435.

Relevance and Uses

Generally, when someone deposits money in the bank, the bank pays interest to the investor in the form of quarterly interest. But when someone lends money from the banks, the banks charge the interest from the person who has taken the loan in the form of monthly compounding interest. The higher the frequency, the more the interest charged or paid on the principal. This is how the banks make their money on the differential of the interest.

Recommended Articles

This has been a guide to Monthly Compound Interest Formula. Here we discuss how to calculate monthly compound interest using its formula along with examples and a downloadable excel template. You can learn more about excel modeling from the following articles –

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