An interest rate is a charge that the borrower must pay to get the loan. A simple or compound interest rate can be used to calculate the interest rate, which is usually represented as a percentage. Simple interest is calculated on the loan or deposit principle. Instead, the principal amount plus the accrued interest are used in compound interest calculations. Calculated on the principal amount of a loan or deposit, simple interest is much easier to compute than the more complex form of the rate called compound interest.
It is the cost of borrowing that is referred to as simple interest (SI). A percentage of a principal amount is all that’s needed to calculate interest on a loan’s principal. Those that borrow money will profit from simple interest since they will only have to pay interest on the loans they have taken. Or, in other terms, simple interest is paying a certain amount to a borrower in exchange for utilising the money borrowed for a specific length of time.
A person can simply calculate Simple Interest by doubling the interest amount by tenure and principle. Simple interest does not take into account the prior interest. Basically, it’s based on the original input. Loans for cars and other consumer goods employ simple interest in calculating the amount of interest that will be paid over time. For example, a certificate of deposit utilises simple interest to determine the return on the investment made by the investor.
Simple Interest Vs Compound Interest
Given below are some key points of difference between Simple Interest and Compound Interest:
- Definition: If you’re borrowing money for a defined term, you’ll have to pay simple interest. While Compound Interest is generated on the principal amount as well as the interest that has already been accrued.
- Formula: Simple Interest Formula = P*I*N while Compound Interest Formula = A = P(1+r/n)^(n*t)
- Rate of Interest levied: For Simple Interest it is on Principal amount while For Compound Interest it is both on Principal as well as interest amount that has been accumulated.
- Principal Amount: The principal amount is the same as that in the beginning of the year. While it increases when it comes to Compound interest because it gets automatically compounded and added to the principal amount.
- Turnover: Returns are very less when it comes to simple interest but it is higher when it comes to compound interest.
- Growth: The Growth in simple interest is pretty steady but in Compound interest it gets exponential due to compounding.
Relation Between Simple Interest And Compound Interest
As a comparison, here’s how simple and compound interest are related
Because of the SI versus CI definition, we already know that interest is usually represented as a percentage and can be either simple or compound interest. Compounded interest takes into account not only how much the principle has increased over time but also how much interest has accrued over time. SI vs CI has previously been covered under the definition of SI versus CI.
Simple interest is defined as a comprehensive loan amount or investment, whereas compound interest is based on the principal amount and interest accrued on it over a given period of time (time ). A loan or deposit’s principal amount alone is used to compute simple interest, which makes it easier to calculate than compounded interest. Simple interest is calculated as follows: Interest = Principal x Rate x Time (in years). Compound interest is calculated using the formula: Amount = P*(1 + r/100)t.
Compounding Interest Period
The amount of compounding periods must be taken into consideration while calculating compound interest. They can have a significant (positive) impact on the accumulated funds. Because of the number of compounding periods, the corpus amount will also rise as a result of the investment term.
Due to the fact that interest is computed at the end of each month, this is the case. Monthly, weekly, quarterly or annually are all possibilities. You’ll earn more if you invest Rs. 100,000 for five years and compound it every year than if you compound it less.
Conclusion
This article discusses in detail the two types of interest that are simple interest and compound interest which are very important for all business sectors nowadays. The major differences have been pointed out between simple and compound interest. Moreover, we have also summed up the compounding period for your better knowledge.