Simply put, compound interest consists of the principal amount and compounded interest over a cycle of the period, while simple interest is based on the principal amount alone.
In many financial services, especially in banking, simple interest and compound interest are two important concepts. Simple interest is used for loans such as installment loans, auto loans, educational loans, and mortgages. The compound interest is used by most of the savings accounts as it pays the interest. It pays more than the simple interest. Let us look at how simple interest differs from compound interest in this article.
Compound and simple interest definitions
Contents
Simple Interest: A simple interest rate is calculated on the principal amount of a loan or deposit.
Compound Interest: In simple terms, compound interest is interest accumulated over the principal.
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- Interest formulas
- Calculator for simple interest
- Calculator for compound interest
Simple Interest vs. Compound Interest: What’s the Difference?
As seen in the table below, Simple Interest differs from Compound Interest in the following ways:
| Differences between simple interest and compound interest | ||
| Defining parameters | Simple Interest | Compound Interest |
| Definition | Using borrowed money over a fixed period of time results in simple interest payments. | The term compound interest refers to a period of time when the sum principal amount and rate of interest exceed the due date for payment. |
| The formula | S.I. = (P × T × R) ⁄ 100 | C.I. = P(1+R⁄100)t − P |
| Amount of Refund | In comparison to compound interest, the return is much lower. | Returns are much higher. |
| Amount of the principal | There is a constant amount of principal | During the entire borrowing period, the principal amount changes |
| Growth | In this method, the growth remains quite uniform. | As a result of this method, the growth is quite rapid. |
| Charged interest | Principal is the amount charged interest on. | Amounts charged for principal and accumulated interest are included in the interest rate. |
FAQs
Compound interest differs from simple interest in what ways?
Unlike compound interest, simple interest depends on both the principal amount and the accumulated interest over a certain period.
How do you calculate simple interest?
The following formula can be used to calculate simple interest:
SI = (PxRxT)/100
In this case, SI stands for simple interest
P = Principal Amount
R = Rate of interest
T = Time Duration in years
Compound interest is calculated using what formula?
The formula below can be used to calculate compound interest:
Amount – Principal = CI
P(1+r/n)nt = Amount
If the amount is compounded annually, what is the formula?
In the case of compounding annually, the amount is as follows:
When P(1+R/100) is divided by 100, then A = P(1+R/100)