What’S The Difference Between A Simple Interest And A Compound Interest?


Simple Interest: Simple interest is a straightforward method of calculating interest on a principal amount over a specified period. The interest is calculated solely on the initial principal amount. The formula for calculating simple interest is: I = P x r x t, where I is the interest, P is the principal amount, r is the rate of interest, and t is the time period.

Compound Interest:

Compound Interest: Compound interest, on the other hand, takes into account not only the principal amount but also the accrued interest from previous periods. This means that the interest is calculated on the principal amount plus any interest that has been added to it. The formula for compound interest is: A = P (1 + r/n)^(nt), where A is the total amount, P is the principal amount, r is the annual interest rate, n is the number of times the interest is compounded per year, and t is the time in years.

Difference: The key difference between simple interest and compound interest lies in how the interest is calculated. With simple interest, the interest remains constant throughout, while with compound interest, the interest can grow exponentially over time due to the reinvestment of previously earned interest. In practical terms, compound interest results in higher overall returns compared to simple interest for the same principal amount and time period.