Difference between Simple and Compound Interest

Interest is the extra amount which one pays against borrowed loan or funds to the lender from whom the borrower has taken loans. The interest is always expressed as a percentage. The interest can be simple or compound.

It is based on the main loan amount or deposit. In contrast, the calculation of compound interest rate depends on the principal amount plus the interest accrued on it in each period. It is always easy to determine simple interest rate as compared to Compound interest as it is calculated only on the principal amount of the loan or deposit.

After getting a brief idea of above mentioned topic let's have a look at some of the key points:

-- The borrower always pays a fee to the lender against a loan taken from them.

-- The simple interest always being paid or received over a specified period. It's a fixed percentage of the principal amount that was taken from the lender.

-- The compound is calculated by adding interest accumulated from time to time to the principal, it is called compound interest. The period after which the interest is calculated and added to the principal is called the compounding period.

Simple Interest

Simple interest is calculated using the following formula:

Simple Interest = P × r × n

Where: P Stands for Principal amount, R stands for annual interest rate and N stands for tenure of loan in years.

Now let's understand the Compound interest with formula:

Compound Interest

= P × (1 + r) t - p

Where P stands for Principal amount, R stands for annual interest rate and T stands for tenure of years interest is applied.

The compound interest is calculated by multiplying the principal amount by one plus the annual interest rate by the number of compound periods, and then subtracting the principal amount for that year. With compound interest, borrowers have to pay interest on the principal plus interest.

Power of compound interest

Though, we all learn the compound interest in school in childhood. But, in reality, its power is understood only by an investor. If you understand in a simple way, the interest you are getting on investing, the interest you will get on it is called compounding. Along with the principal, interest is also earned on its interest. Compounding is the best way to double or triple your investment.

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