The major difference between simple interest and compound interest is that simple interest is based on the principal amount. In contrast, compound interest is based on the principal amount and the interest compounded for a cycle of the period.
We know that simple interest and compound interest are the two important concepts widely used in many financial services, especially in banking. Loans such as instalments loans, auto loans, educational loans, and mortgages use simple interest. Compound interest is used by most savings accounts as it pays the interest. It pays more than simple interest. In this article, let us discuss the difference between simple interest and compound interest in detail.
Definition of Simple and Compound Interest
Simple Interest: Simpleinterest can be defined as the principal amount of a loan or deposit a person makes into their bank account.
Compound Interest: Compound interest is the interest that accumulates and compounds over the principal amount.
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What is the Difference between Simple and Compound Interest?
Below you can find the key differences between Simple Interest and Compound Interest in the tabular column below:
| Simple Interest and Compound Interest Differences | ||
|---|---|---|
| Parameter | Simple Interest | Compound Interest |
Definition | Simple Interest can be defined as the sum paid back for using the borrowed money over a fixed period of time. | Compound Interest can be defined as when the sum principal amount exceeds the due date for payment, along with the rate of interest for a period of time. |
Formula | S.I. = (P × T × R) ⁄ 100 | C.I. = P(1+R⁄100)t − P |
Return Amount | The return is much lesser when compared to compound interest. | The return is much higher. |
Principal Amount | The principal amount is constant. | The principal amount keeps on varying during the entire borrowing period. |
Growth | The growth remains quite uniform in this method. | The growth increases quite rapidly in this method. |
Interest Charged | The interest charged on is for the principal amount. | The interest charged on it is for the principal and accumulated interest. |
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Solved Examples
Q.1: Amita borrowed ₹50,000 for 3 years at a rate of 3.5% per annum. Find the simple interest.
Solution: Given,
P = Rs 50,000
R = 3.5%
T = 3 years
SI = (P × R ×T) / 100
SI = (50,000× 3.5 ×3) / 100 = ₹ 5250
Q.2: The count of a population of men was found to increase at the rate of 2% per hour. Find the count at the end of 2 hours if the initial count was 600000.
Solution: Since the population of men increases at the rate of 2% per hour, we use the formula
A = P(1 + R/100)n
Thus, the population at the end of 2 hours = 600000(1 + 2/100)2
= 600000(1 + 0.02)2
= 600000(1.02)2
= 624240
Frequently Asked Questions – FAQs
Q1
What is the main difference between simple interest and compound interest?
Simple interest is computed on the principal amount or loan amount whereas compound interest is computed based on the principal amount as well as the interest accumulated for a certain period or previous period.
Q2
What is the formula for simple interest?
The formula for simple interest is given by:
SI = (P x R x T)/100
where SI = Simple Interest
P = Principal Amount
R = Rate of interest
T = Time duration in years
Q3
What is the formula for compound interest?
The formula for compound interest is given by:
CI = Amount – Principal
and Amount = P(1+r/n)nt
Q4
What is the formula for the amount if it is compounded annually?
If the amount is compounded annually, the amount is given as:
A = P(1+R/100)t
