Difference between Simple Interest and Compound Interest | Formula & Examples
Difference between Simple Interest and Compound Interest
When we study interest chapter we
usually get confused between Simple Interest and Compound Interest. So, here we
will going to discuss on Difference
between Simple Interest and Compound Interest because most of the students
have this question in their mind while solving interest question. We will
discuss difference of SI and CI in a simple and easy way with the help of Formula
& Examples through which it will become easier to understand and remind it
for last long.
Interest is the term that is used
when a person borrows money from the money lender or any bank/financial
institution then some extra amount is charged by the lending entity for the use
of that money. That extra charge which is charged by lending entity is known as
interest. To study in deep about Simple Interest and Compound Interest you need
to go through underneath section of page that is prepared by the team members
of www.privatejobshub.in. So, go ahead and learn about Simple Interest Vs
Compound Interest.
What is the Difference between Simple Interest and Compound Interest
Interest can be charged in two ways
that is simple interest and compound interest. The former is the type of
interest where the interest is charged only on loaned amount but in the case of
the latter interest is calculated on the amount lent plus accumulated interest.
So, Simple Interest is the sum paid for using the borrowed money, for a
fixed period. On the other hand, whenever the interest becomes due for payment,
it is added to the principal on whom interest for the succeeding period is
considered, this is known as Compound
Interest.
Learn Simple Interest and Compound Interest
Formula’s
Formula: Simple Interest = P×I×N
|
Where,
- P = Principal Amount
- I = rate of interest
- N = number of years
Formula: Compound Interest = P {(1 + i) n – 1}
|
Where,
- P = Principal
- N = number of years
- I = rate of interest per period
Difference
between Simple Interest and Compound Interest
BASIS FOR COMPARISON
|
SIMPLE INTEREST
|
COMPOUND INTEREST
|
Meaning
|
Simple Interest refers to an interest that is
calculated as a percentage of the principal amount.
|
Compound Interest refers to an interest which is calculated
as a percentage of principal and accrued interest.
|
Interest charged on
|
Principal
|
Principal + Accumulated Interest
|
Principal
|
Constant
|
Goes on changing during the entire borrowing
period.
|
Return
|
Less
|
Comparatively high
|
Growth
|
Remains uniform
|
Increases rapidly
|
Formula
|
Simple Interest = P*r*n
|
Compound Interest = P*(1 + r)^nk
|
Example for CI and SI
Question: Suppose Alex deposited
Rs. 1000 to a bank at 5% interest (simple and compound) p.a. for 3 years. Find
out the total interest that he will get at the end of the third year?
Solution: Here P = 1000, r = 5%
and t = 3 years
Simple interest =
Compound interest =
Conclusion
By going through above
information, it is understood that Interest is the fee for using someone else’s
money. There are many reasons for paying interest like time value of money,
inflation, opportunity cost, and risk factor.
Simple Interest is quick to
calculate on the other hand Compound Interest is practically difficult. If you
compute, both simple interest and compound interest for a given Principal,
Rate, and Time, you will always find that compound interest is always higher
than the simple interest due to the compounding effect on it. This you can
judge by going through above example.
Check Some Other Important Maths Preparation Links
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Final Note:
You can go through the prepared page to know about Difference
between Simple Interest and Compound Interest with the help of Formula &
Examples. If you face any query or any suggestion related to this you can leave
a comment in below mentioned comment box our team will soon reply towards it. Also,
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