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# Difference Between Simple Interest And Compound Interest Pdf

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Published: 22.12.2020  Anyone who thinks of taking a loan first looks at the cost of doing so. If you want to borrow then you will look at the lowest rates possible. However, from an investors point of view, a high rate will be beneficial.

## What Is the Difference Between Simple Interest vs. Compound Interest?

The interest rate is mutually decided by both the parties. Interest can be charged in two ways, i. 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 borowed money, for a fixed period. On the other hand, whenever the interest becomes due for payment, it is added to the principal, on which interest for the succeeding period is reckoned, this is known as compound interest. So, here in this article, you will find the basic differences between Simple Interest and Compound Interest, which we have compiled after an in-depth research on the two terms. 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 is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest. Compound interest is standard in finance and economics. Compound interest is contrasted with simple interest , where previously accumulated interest is not added to the principal amount of the current period, so there is no compounding. The simple annual interest rate is the interest amount per period, multiplied by the number of periods per year. The simple annual interest rate is also known as the nominal interest rate not to be confused with the interest rate not adjusted for inflation , which goes by the same name.

Interest is the fees paid by the borrower to the lender for borrowing money. For example, banks charge interest on the loans taken by the customers. People deposit money in the banks to earn interest on the amount deposited. Higher interest rates higher is the opportunity for investors to earn higher rates of return. There are two ways to calculate the interest on the principle: Compound and the Simple interest. Simple interest, as the name suggests, is simple in the calculation and to understand. ## Simple Interest vs. Compound Interest: The Main Differences

There are two ways for a lender to charge interest on a loan , which are the simple interest and compound interest methods. Simple interest is calculated based solely on a percentage of the loaned amount, while compound interest is calculated based on a percentage of the loaned amount and interest. The higher the frequency of compounding, the higher the return will be for the lender. These variations in how the calculation is derived result in the following differences:. Amount charged. The amount of interest charged is lower when simple interest is used, since this calculation does not include a charge for any interest outstanding. The amount charged when compounding is used can vary, depending on how frequently the compounding calculation occurs.

Anyone who takes out a loan has to think about the cost of doing so. Interest can be simple or it can compound over time. Check out our investment calculator. The term interest indicates how much you can earn from the money you originally invest. As your investment sits in an account over time, interest accumulates and you can watch your funds grow. ## What Is the Difference Between Simple Interest vs. Compound Interest?

There are two different ways of calculating interest -- simple and compound. Here's how to calculate each, as well as the key differences and similarities between the two. Simple interest Simple interest is well, simple. Each year, the interest is calculated as a percentage of the principal, as follows:. Compound interest In the real world, simple interest is rarely used.

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#### Content: Simple Interest Vs Compound Interest

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