## What is the Monthly Compound Interest Formula?

Monthly compounding formula 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.

When interest is compounded on a monthly frequency it is known as monthly compound interest. In monthly compounding interest is charged both on the principal as well as the accumulated interest. For the calculation of monthly compounding, it is important to know the principal portion of the time frame and the annual interest charged by the lenders.

The equation for calculating the monthly compound interest is represented as follows,

**A= (P (1+r/n)^(nt)) – P**

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 interest amount for quarterly compounding. 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

#### Example #1

**Let us know to try to understand how to calculate monthly compound interest with the help of an example. 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 the loan provided.**

Below is the given data for the calculation of monthly compound interest.

The Monthly Compound Interest can be calculated as,

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

**Monthly Compound Interest will be –**

**Monthly Compound Interest = $691.55**

So from the formula of calculating the monthly compound interest, the monthly interest will be $ 691.55.

#### Example #2

**Let us know to try to understand how to calculate monthly compound interest with the help of another example. 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 the loan provided.**

Below is the given data for the calculation of monthly compound interest.

The Monthly Compound Interest can be calculated as,

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

**Monthly Compound Interest will be –**

**Monthly Compound Interest = $14,616.88**

So from the formula of calculating the monthly compound interest, the monthly interest will be $ 14,617.

#### Example #3

**Let us know to try to understand how to calculate monthly compound interest with the help of another example. 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 the loan provided. **

Below is the given data for the calculation of monthly compound interest.

The Monthly Compound Interest can be calculated as,

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

**Monthly Compound Interest will be –**

**Monthly Compound Interest = $29435**

So the monthly interest will be $ 29,435.

### Relevance and Uses of Monthly Compound Interest Formula

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 downloadable excel template. You can learn more about excel modeling from the following articles –

- What is Interest Formula?
- Compound Interest Definition
- Exponential Distribution
- Compound Journal Entry
- Daily Compound Interest
- Calculate Simple Interest
- Calculate Exponential Growth
- Compound Interest Formula Excel
- Continuous Compounding Calculation

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