Supplier late-payment charges, short loans in days, compounding frequency, effective annual rate and the rule of 72.
By Manoj Sahukar· October 2026 · 11 min read
How numbers are rounded on these pages. Calculations are done at full precision and rounded only at the end, half up. Rupee amounts are rounded to the nearest rupee unless shown with paise, in which case to the nearest paisa. Percentages are shown to two decimal places, and days to one decimal place. Break-even quantities and reorder levels are rounded up to the next whole unit, because rounding down would leave you short. Economic order quantity is rounded to the nearest whole unit. Interest for a number of days uses a 365-day year. All examples and quiz questions are Hypothetical: they show the method, not real prices or rates.
Simple interest
With simple interest, interest is charged only on the original amount borrowed (the principal), never on interest already added. It is how most supplier late-payment charges, many short informal loans and quick comparisons work.
The rate is almost always quoted per annum (per year). For a period in days, convert the days into a part of a year. This page uses a 365-day year; some lenders and agreements use 360 days, which gives a slightly higher interest figure, so always check the convention in your agreement.
The standard formulas
Simple interestSI = P × R × T100Amount to repay A = P + SI
Period in days (365-day year)For days: T = Number of days365So SI = P × R × Days100 × 365
Finding the rate or the timeR = SI × 100P × TT = SI × 100P × R
Terms used
Principal (P)
The amount borrowed or owed, on which interest is calculated.
Rate per annum (R)
Interest for one year as a percentage of the principal. “₹2 per ₹100 per month” is 2% a month, or 24% per annum simple.
Time (T)
The period in years. 90 days is 90 ÷ 365 of a year here.
Amount (A)
Principal plus interest: what you repay in total.
Worked examples
HypotheticalBasicA two-year loan at simple interest
A trader borrows ₹2,00,000 for 2 years at 12% per annum simple interest.
SI = ₹2,00,000 × 12 × 2 ÷ 100 = ₹48,000
Amount to repay = ₹2,00,000 + ₹48,000 = ₹2,48,000
HypotheticalIntermediateLate-payment interest on a supplier's bill
A supplier charges 18% per annum simple interest on overdue bills. A bill of ₹3,50,000 is paid 45 days late.
On a 360-day convention it would be ₹7,875.00; check which your supplier uses.
HypotheticalAdvancedThe real rate on a short informal loan
A lender offers ₹50,000 today if you repay ₹53,000 after 60 days. What simple annual rate is that?
Interest = ₹3,000 for 60 days. R = SI × 100 ÷ (P × T)
R = ₹3,000 × 100 ÷ (₹50,000 × 60 ÷ 365) = 36.50% per annum
“Just 6% extra” sounds small. Per year, it is over three times a typical bank limit rate.
Compound interest
With compound interest, interest is added to the principal at regular intervals, and the next interest is calculated on that bigger amount: interest on interest. How often this happens is the compounding frequency: yearly, half-yearly, quarterly or monthly. The more often, the more you pay (or earn) at the same quoted rate.
To compare offers with different frequencies, convert each to an effective annual rate, the rate that would give the same result if compounded once a year. For a quick idea of how fast money doubles, the rule of 72 says: years to double ≈ 72 ÷ annual rate. It is an approximation, best for rates of roughly 6% to 10% and less accurate at high rates.
Doubling timeExact doubling time (yearly compounding) = ln 2ln(1 + r)Rule of 72: years ≈ 72rate in %
Terms used
P
Principal: the starting amount.
r
Nominal annual rate as a decimal (12% = 0.12).
n
Compounding periods per year: 1 yearly, 2 half-yearly, 4 quarterly, 12 monthly.
t
Time in years.
Effective annual rate (EAR)
The yearly rate after allowing for compounding within the year.
Worked examples
HypotheticalBasicCompound vs simple over three years
₹1,00,000 at 8% per annum, compounded yearly, for 3 years.
A = ₹1,00,000 × 1.083 = ₹1,25,971.20
CI = ₹25,971.20, compared with simple interest of ₹24,000
HypotheticalIntermediateSame rate, different compounding
₹5,00,000 at 12% per annum for 2 years.
Compounding
Amount after 2 years
Effective annual rate
Yearly (n = 1)
₹6,27,200.00
12.00%
Quarterly (n = 4)
₹6,33,385.04
12.55%
Monthly (n = 12)
₹6,34,867.32
12.68%
Monthly compounding costs ₹7,667.32 more than yearly over two years, at the same “12%”.
HypotheticalAdvanced“1.5% a month” as a yearly rate
A finance company charges 1.5% per month, compounded monthly (18% per annum nominal).
Effective annual rate = 1.01512 − 1 = 19.56%
On ₹1,00,000 for a year you would owe ₹1,19,561.82, not ₹1,18,000.
HypotheticalAdvancedDoubling time and the rule of 72
Rate (yearly compounding)
Rule of 72
Exact
8%
9.0 years
9.01 years
12%
6.0 years
6.12 years
36%
2.0 years
2.25 years
The rule is close at 8% and 12%, and noticeably off at 36%. Use it for quick thinking, and the formula for decisions.
Quiz: simple and compound interest
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