Compound interest vs. Simple interest
Are you confused between the concepts of compound and simple interest? If yes then, stop thinking more and start reading this piece of information in detail because it contains Compound interest vs. simple interest comparison that will blow your mind with its understandable differences and facts. So, if you are one of those passionate studious students stuck in understanding the distinction between these two essential concepts, this article will surely satisfy you! Let’s read it into detail together!
What is the difference between compound interest and simple interest?
Compound and simple interest are two different concepts used for calculating interest on the principal amounts but they differ significantly from each other due to their calculating natures.
Compound interest is the interest that is calculated on the initial investment or principal amount and interest accumulated over a specific time whereas simple interest is only calculated on the principal amount that a person deposits in a bank account.
Formulas
The following are the formulas for calculating both kinds of interests.
- Compound interest formula:
A = P ( 1 + R / N ) power N×T
Where,
A is the total amount, principal plus accumulated interest
P is the principal amount
N is the compounding frequency
R is the effective interest rate
T is the time required for the interest to be applied.
- Simple interest formula:
SI = P + ( P × R × T)
Where,
SI is a simple interest amount
P is the principal amount
R is the interest rate
T is the time duration that shows the number of years
Comparison Table
The following table compares compound and simple interest based on different factors:
| Comparing factors | Compound Interest | Simple Interest |
| Definition | It calculates interest on initial investment and interest accumulated as well. | It only calculates interest on the principal amount. |
| Formula | A = P ( 1 + R / N ) power N×T | SI = P + ( P × R × T) |
| Return on investment | High return as compared to simple interest | Low rate of return |
| Principal amount | You can keep adding contributions in the principal amount for further earning | The principal amount remains constant |
| Growth | The growth is rapid and more frequent as compared to the simple interest | The growth remains the same in this method of calculating interest |
Final Verdict
To sum up, this article is all about compound interest vs. simple interest comparison that is specifically written to clear the confusion of readers. Along with the theoretical description, this piece of writing also contains the tabular form of description so that there will be no room for confusion left for the readers.
Moreover, it also contains formula examples with proper application of formulas to further assist the students in solving the problems related to compound and simple interest.
Frequently Asked Questions
- What is the key difference between compound interest and simple interest?
Simple interest is calculated only on the principal amount whereas compound interest is calculated on the principal amount as well as on accumulated interest for a certain time duration..
- Is it easy to calculate simple and compound interest manually?
Yes, it is easy to calculate it through formulas.
- What is the formula for simple interest?
The formula to calculate simple interest is SI = (P X R X T) / 100, where P is the principal amount, R is the compounding frequency and T shows time.
- What is the formula if the amount is compounded annually?
If the amount is compounded annually then this formula will be used.
A = P (1 + R/100) with power “t” that shows time.