The major difference between simple interest and compound interest is that simple interset in 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 instalments loans, auto loans, educational loans, mortgages use simple interest. The compound interest is used by most of the savings account as it pays the interest. It pays more than the simple interest. In this article, let us discuss the difference between the simple interest and the compound interest in detail.
Definition of Simple and Compound Interest
Simple Interest: The simple interest can be defined as the principal amount of loan or deposit, a person makes into their bank account.
The formula for simple interest is:
Simple Interest = Principal amount (P) x Interest Rate (I) x Term of loan or deposit (N) in years
Compound Interest: The Compound interest is simply the interest that accumulates and compounds over the principal amount.
Similarly, it is also possible to calculate the formula for the compound interest as well, the formula for the compound interest can be calculated as:
Compound Interest = Total amount of Principal and Interest in future less Principal amount at present.
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What is the Difference between Simple and Compound Interest?
Below you can find the key differences between Simple Interest and Compound Interest in the tabular column below:
|Simple Interest and Compound Interest Differences|
|Parameter||Simple Interest||Compound Interest|
|Simple Interest can be defined as the sum paid back for using the borrowed money, over a fixed period of time.||
Compound Interest can be defined as when the sum principal amount exceeds the due date for payment along with the rate of interest, for a period of time.
|S.I. = P × T × R ⁄ 100||C.I. = P(1+R⁄100)t − P|
|The return is much lesser when compared to Compound Interest.||
The return is much higher.
|The principal amount is constant||
The principal amount keeps on varying during the entire borrowing period
|The growth remains quite uniform in this method.||
The growth increases quite rapidly in this method.
|The interest charged on is for the principal amount.||
The interest charged on it is for the principal and accumulated interest.
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Q.1: Amita borrowed Rs 50,000 for 3 years at the rate of 3.5% per annum. Find the simple interest.
P = Rs 50,000
R = 3.5%
T = 3 years
SI = (P × R ×T) / 100
SI = (50,000× 3.5 ×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 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
Frequently Asked Questions – FAQs
What is the main difference between simple interest and compound interest?
What is the formula for Simple interest?
SI = (PxRxT)/100
where SI = Simple Interest
P = Principal Amount
R = Rate of interest
T = Time Duration in years
What is the formula for compound interest?
CI = Amount – Principal
And Amount = P(1+r/n)nt
What is the formula for the amount if it is compounded annually?
A = P(1+R/100)t