Interest Capitalisation Calculator

Interest capitalisation is the moment when unpaid interest gets added to the principal of a loan. After that, the larger principal earns interest in its own right — the borrower starts paying interest on the previously-unpaid interest. Student loans typically capitalise at the end of a deferment, grace period, or forbearance; some construction loans capitalise at the point of completion; some commercial loans capitalise on a schedule set in the contract. The mechanism is what makes a deferral genuinely costly even when it feels like a payment break.

How to use it

Enter the starting loan balance, the annual interest rate, and the number of years over which unpaid interest accrues. The calculator returns the balance at the end of the deferral after the unpaid interest is capitalised, the total interest added, and the percentage growth. Adjust any input and the output recalculates instantly. The currency selector at the top of the calculator changes formatting throughout — the math itself is currency-neutral, so the same ratios produce the same growth percentage regardless of currency.

Worked example

Picture a 30,000 loan balance at a 6% annual rate, deferred 5 years (currency follows the selector). Standard compound interest gives a final balance of 30,000 × (1 + 0.06)⁵ = 40,146.77. Interest capitalised is 10,146.77 — about 33.82% growth on the original balance, before any payments have been made. Drop the rate to 4% and the final balance is 36,499.59 (21.67% growth); raise the deferral to 10 years and the final balance is 53,725.43 (79.08% growth) at the original 6% rate. The growth is non-linear in time because each year compounds on the previous year's already-grown balance.

How the math works

The formula is the standard compound-interest expression: Balance = P × (1 + r)^t where P is the starting balance, r is the annual rate as a decimal (e.g., 6% becomes 0.06), and t is the number of years. The interest capitalised is the final balance minus the original; the growth percentage is the interest capitalised divided by the original balance. The model assumes annual compounding and that no payments are made during the deferral period.

Why capitalisation matters even on a small loan

The cost of capitalisation grows non-linearly with both rate and time. Doubling the deferral years more than doubles the interest added; raising the rate from 4% to 8% does not double the interest added — it increases it by more than the rate ratio because compounding is multiplicative. The same starting balance can grow to noticeably different final balances depending on which combination of rate and term applies. Running a few what-if scenarios on the calculator above is usually clearer than reading any general statement about deferral cost.

What this calculator doesn't capture

The model assumes a single capitalisation event at the end of the deferral period and a constant rate throughout. Real-world contracts can capitalise on different schedules — monthly, quarterly, at specific events, or only on portions of the unpaid interest — and rates can change during the deferral. Some loan products also have caps on how much interest can be capitalised, or rules that exclude certain types of unpaid interest (for example, subsidised portions of some student loans). Read the loan terms for the specific capitalisation rules of any particular product.