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Daily Interest Formula:
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The daily interest formula calculates how much interest accrues each day on a loan or investment. It's particularly useful for understanding the daily cost of borrowing or the daily earnings on an investment.
The calculator uses the daily interest formula:
Where:
Explanation: This formula divides the annual interest by 365 days to determine the daily interest amount. Some calculations may use 360 days for simplicity in certain financial contexts.
Details: Calculating daily interest helps borrowers understand the true cost of loans over time and helps investors see how their money grows daily. It's essential for comparing loan offers and understanding compounding effects.
Tips: Enter the principal amount in dollars and the annual interest rate as a decimal (e.g., 5% = 0.05). Both values must be positive numbers.
Q1: Why divide by 365 instead of 360?
A: While some financial institutions use 360 days for simplicity, dividing by 365 provides a more accurate daily rate as it accounts for the actual number of days in a year.
Q2: How does daily interest affect compounding?
A: When interest compounds daily, each day's interest is added to the principal, causing the interest to grow exponentially over time.
Q3: Can I use this for credit card interest?
A: Yes, this formula can help estimate daily credit card interest, though credit card companies may use slightly different methods for calculating average daily balances.
Q4: What's the difference between simple and compound daily interest?
A: This formula calculates simple daily interest. Compound interest would require a more complex formula that accounts for interest earned on previously accrued interest.
Q5: How accurate is this calculation for leap years?
A: For maximum precision in leap years, you could divide by 366 instead of 365, though the difference is minimal for most practical purposes.