Difference Between Simple Interest and Compound Interest
Interest is the fees paid by the borrower to the lender for borrowing money. For example, banks charge interest on the loans taken by the customers. People deposit money in the banks to earn interest on the amount deposited. Higher interest rates are the opportunity for investors to earn higher rates of return. There are two ways to calculate the interest on the principle: Compound and Simple interestSimple interest (SI) refers to the percentage of interest charged or yielded on the principal sum for a specific period.read more. What is Simple Interest?Simple interest, as the name suggests, is simple in the calculation and understanding. It is the amount that the lender charges the borrower on only the principal loan. The formula to Calculate Simple InterestSimple Interest (SI) is a way of calculating the amount of interest that is to be paid on the principal and is calculated by multiplying the principal amount with the rate of interest and the number of periods for which the interest has to be paid.read more is: Where SI is Simple Interest
The amount owed at the end of the period is given by A = SI + P or A = PRT/100 + P You are free to use this image on your website, templates, etc., Please provide us with an
attribution linkArticle Link to be Hyperlinked What is Compound Interest?Compound interest is earned on the principal amount and the accrued interest. Compound interest depends on the frequency of compounding, i.e., the interest can be compounded daily, monthly, quarterly, half-yearly or annual, etc. The formula to calculate the amount earned when the principal is compounded is given as: Where A is the Amount,
Thus, the Compound Interest is calculated = A – P = P (1 + r/100)T – P It can be equal to or more than the simple interest depending on the time and frequency of compounding. Simple Interest vs Compound Interest InfographicsLet’s see the top differences between simple vs. compound interest. You are free to use this image on your website, templates, etc., Please provide us with an attribution linkArticle Link to be Hyperlinked Examples of Simple Interest vs Compound InterestExample #1Consider a person XYZ who keeps $ 1000 in a bank for one year at a 5% interest rate. Calculate the Simple and compound interest (compounded annually). Simple Interest = P * R * T/100
Compound Interest = P (1 + r/100)T – P
The interest is equal since the interest is compounded annually, and the deposit duration is 1. Example #2Let’s consider the same example and change the duration to 2 years. Simple Interest = P * R * T/100
Compound Interest = P (1 + r/100)T – P
Thus, with the change in the deposit duration, the interest earned has increased by $ 2.5. This, $ 2.5, is the interest earned on the interest accumulated in the first year of the deposit. Key DifferencesKey Differences are as follows –
Simple vs Compound Interest Comparative Table
Recommended ArticlesThis has been a guide to Simple Interest vs. Compound Interest. Here we discuss the top difference between them, infographics, and a comparative table. You may also have a look at the following articles –
What is the difference between the simple interest and compound interest?What is the main difference between simple interest and compound interest? Simple interest is computed on the principal amount or loan amount whereas compound interest is computed based on the principal amount as well as the interest accumulated for a certain period or previous period.
What is the difference between simple and compound interest on Rs 42000 at 5% rate for 2 years?The difference between the compound interest and the simple interest on Rs. 42000 for two years is Rs. 105 at the same rate of interest per annum.
What is the difference between the simple interest of 5% for 3 years?The difference between simple and compound interest on a sum for 3 years at 5% p.a. is Rs. 76.30 .
What is the simple interest of 5%?For example, say you invest $100 (the principal) at a 5% annual rate for one year. The simple interest calculation is: $100 x . 05 interest x 1 year = $5 simple interest earned after one year.
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