Difference Between Simple Interest and Compound Interest

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

Definition

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.

Formula

S.I. = P × T × R ⁄ 100 C.I. = P(1+R⁄100)t − P

Return Amount

The return is much lesser when compared to Compound Interest.

The return is much higher.

Principal Amount

The principal amount is constant

The principal amount keeps on varying during the entire borrowing period

Growth

The growth remains quite uniform in this method.

The growth increases quite rapidly in this method.

Interest Charged

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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Solved Examples

Q.1: Amita borrowed Rs 50,000 for 3 years at the rate of 3.5% per annum. Find the simple interest.
Solution:Given,
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
= 600000(1.02)2
= 624240

Frequently Asked Questions – FAQs

What is the main difference between simple interest and compound interest?

Simple interest is computed on the principal amount or loan amount whereas compound interest is computed based on 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 = (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?

The formula for compound interest 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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