Simple Interest and Compound Interest

This article is about Simple Interest and Compound Interest. We also have video lectures on English Grammar in Hindi. If you have any doubts then please ask them in the comments below. 

Interest in general means the cost imposed on the amount of borrowed money, and basing on the rate it is calculated, can be said as simple or compound interest. Now, talking about simple interest let me tell you it's calculated only over the principal amount of the borrowed amount. Whereas, in the case of compound interest along with the principal amount the collected interest of the previous periods is also taken into account and so is often mentioned as “interest on interest”. The compounded impact can have a big difference in the net payable amount on the borrowing or loan compared to the rate of interest calculated on simple interest. Don't worry there is beneficial side to it also, as it can be lucrative and wise on your part when you invest and can lead to more wealth generation. These two are the very fundamental financial concepts and being aware with these can help you to draw out a profitable decision while applying for a loan or at the time when you are about to make an investment and save you a good amount considered on a long-term basis.

Now let's talk about what is the difference between Simple Interest and Compount interest. While we talk about the loan calculated on simple interest is done by multiplying the principal amount with the rate of interest and also on the time laps or for the time period the loan is applied for. Normally, simple interest is paid on the decided period and is a fixed proportion of the principal amount that has been borrowed. Let's understand with the help of an example a person takes a simple interest loan for his some reason, the amount being $18,000 and the yearly rate of interest is 6% basing on the loan. After repayment, the loan amount for more than 3 years the simple interest paid will be $3,240. The complete amount given by him will be $21,240 or $ 18,000 + $3,240.

On the contrary, compound interest along with the principal amount is multiplied by the yearly interest rate entitled to the number of compound time period subtracting one from it. Just opposite to the simple interest process compound interest increases depending on the earlier accumulated interest. Let's take an example in this case too. A person takes a loan for compounded interest worth $20,000, and the year yearly rate of interest is 8% on the loan. He does the repayment over 4 years and the paid amount was $7,209.77, or $20,000 and the complete mount he repaid will be $27,209.77 or $ 20,000+$7,209.77.

Some simple tricks can make the calculation of the interest rates easier, and helps to solve the problems and questions:

Let's take help of question – You have deposited 4000 dollars in a bank account and the yearly rate of interest is 8%. What will be the rate of interest after 4 years, using the formula, I = p× r × t. Where r is the rate of interest stands for time, so the calculation will be I = p× r × t, I = 4000× 8% × 4, I = 4000× 0.08 × 4, I = 1280 dollars.