What is the difference between simple interest and compound interest?
In finance, interest is an important part of most decisions on investment and lending. Interest is in many ways “rental fee”: it is money that is charged or paid on the basis of the total cumulative amount from the loan and is usually calculated in one of the two ways. Simple interest is calculated on the basis of a flat percentage rate of principal and remains constant throughout the investment. The compound interest is also based on the percentage of the principle, but then it is added to the principle, so the principle - and the amount of interest owned on it - grows with every new interest time. Although a simple interest and compound interest may seem on the surface, they have much different results over time.
The basic principle of simple interest is that the interest rate remains constant and the payments owed are predictable and solid. For example, if a person takes a two -year personal loan of $ 100 in the US (USD) on the basis of Simplete an interest rate of 10% per year, its interest payable will be $ 10 per year, forTotal debt $ 120. The formula for calculating simple interest is i = PRT, where "i" is the total interest; "P" is the principle; "R" is an interest rate in decimal form; And "T" is the total duration of the loan in years.
If the same loan was subjected to a combined interest rate, the total amount payable would be a little more. Simple interest and compound interest rates use the principle as the basis of the calculation, but in a compound scenario, this principle increases with each interest payment. This means that after the first year the principle in the example would no longer be $ 100, but rather $ 110. 10% interest for the second year would be calculated on this amount, which would mean that the final amount would be $ 121.
The interest with the formula s = p (1+r/n)
Simple interest and interest can be desirable in various circumstances, although the interest, for better or worse, is the calculation of interest -most commonly used banks and financial institutions. The compound interest usually prefers the creditor because at the end of the loan period owes more money. Most credit card companies are expanding to the scheme of continuous combining, where interest is calculated and owed the total amount of the statement every month or year. This can make the total more difficult, more expensive and in time for many debtors.
credit card users generally have no choice to choose between simple interestem and composed interest. In many ways, the interest is what allows you to expand credit for many credit card companies. However, consumers may have more in terms of further investments and financial transactions. The choice is not always straightforward as a choice between simple interest and compound interest, but banks and other creditors sometimes give debtors some flexibility in terms of negotiations, frequency and calculation of interest. Various banks and institutions offer different, often competing interest rates that make research in many cases.