Fabina borrows Rs. 12500 at 12% per annum for 3 years at simple interest and Radha borrows the same amount for the same period at 10% per annum, compounded annually. Who pays more interest and by how much?

Solution:

Case 1: Fabina – simple interest

Principal, P = 12500

Rate of interest, r = 12%

Number of years, n = 3

Simple interest, I = Pnr

= 12500×3×12/100

= 4500

Case 2: Radha – compound interest

Principal, P = 12500

Rate of interest, r = 10%

Number of years, n = 3

Amount= P(1 + r/100)n

= 12500(1 + 10/100)3

= 12500(11/10)3

= 16637.5

Compound interest = 16637.5 – 12500 = 4137.5

4500 – 4137.5 = 362.5

Hence Fabina pays more interest (Rs. 362.5) than Radha.

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