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Difference Between Simple Interest and Compound Interest

Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus accumulated interest over time. The key difference is that compound interest compounds, meaning interest is calculated on both the principal and previously accumulated interest, leading to higher overall returns compared to simple interest which does not compound. Compound interest is commonly used in savings accounts while simple interest is used more for loans.

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Annie Recile
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126 views

Difference Between Simple Interest and Compound Interest

Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus accumulated interest over time. The key difference is that compound interest compounds, meaning interest is calculated on both the principal and previously accumulated interest, leading to higher overall returns compared to simple interest which does not compound. Compound interest is commonly used in savings accounts while simple interest is used more for loans.

Uploaded by

Annie Recile
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Difference Between Simple Interest and Compound Interest

The major difference between simple interest and compound interest is that simple interest is
based on principal amount whereas compound interest is based on the principal amount and
the interest compounded for a cycle of the period.
We know that simple interest and the compound interest are the two important concepts widely
used in many financial services most especially in banking purposes. Loans such as
installments loans, auto loans, educational loans, mortgages use simple interest. The
compound interest used by most of the savings’ account as it pays the interest. It pays more
than the simple interest.
Definition of Simple and Compound Interest
Simple Interest: It can be defined as the principal amount of loan or deposit; a person makes
into their bank account.
Compound Interest: Simply the interest that accumulates and compounds over the principal
amount.
Tabular Column

PARAMETER SIMPLE INTEREST COMPOUND INTEREST


DEFINITION Simple interest can be Compound interest can be
defined as the sum paid back defined as when the sum
for using the borrowed principal amount exceeds the
money, over a fixed period of due date for payment along
time. with the rate of interest, for a
period of time.
FORMULA S.I. = (P x T x R) / 100 C.I. = P(1+R/100) +- P
RETURN AMOUNT The return is much lesser The return is much higher.
when compared to
Compound interest.
PRINCIPAL AMOUNT The principal amount is The principal amount keeps
constant. on varying during the entire
borrowing period.
GROWTH The growth remains quite The growth increases quite
uniform in this method. rapidly in this method.
INTEREST CHARGED The interest charged on is for The interest charged on it is
the principal amount. for the principal and
accumulated interest.
Examples:
Q. 1: Amita borrowed Rs 50,000 for 3 years at a rate of 3.5% per annum.
Find the simple interest.
Solution:
Given,
P= Rs 50,000
R= 3.5%
T= 3 years
SI= (P x R x T) / 100
SI= (50,000 x 3.5 x 3) / 100= Rs 5250

Q.2: The count of a population of men was found to increase at the rate of 2% per hour. Find
the count at the end of 2 hours if the initial count was 600000.
Solution: Since the population of men increases at the rate of 2% per hour, we use the formula
A= P (1 + R/100)ⁿ
Thus, the population at the end of 2 hours= 600000(1 + 2/100)²

= 600000 (1 + 0.02)²
= 600000 (1.02)²
= 624240
Frequently Asked Questions
1. What is the main difference between simple interest and compound interest?
 Simple interest is computed on the principal amount of 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 formula for Simple interest?
The formula for simple interest is given by:
SI = (P x R x T)/100
Where SI= Simple Interest
P= Principal Amount
R= Rate of Interest
T= Time Duration in years
Formula for Compound Interest
The Formula is given by:
CI = Amount-Principal
And Amount= P (1 + r/n)ⁿᵗ
What is the formula for the amount if it is compounded annually?
If the amount is compounded annually, the amount is given as:
A = P (1+R/100)ᵗ

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