What Is the Difference between Simple Interest and Compound Interest?

Simple interest method (simple interest method) is a method of converting the time value of funds. With this method, interest is calculated on the principal, and interest is no longer profitable.

Simple interest method

The characteristics of the compound interest method: the principal is gradually increased with the extension of the term, reflecting the time value of the funds. It is suitable for calculating long-term borrowing interest.

The simple interest method is calculated as follows:

J = P · i · n

F = p · (1 + i · n)

In the formula:

J is the total interest;

F for the principal and benefit;

P is the principal amount,

i is the interest rate,

n is the number of interest-bearing periods, and the number of years corresponding to the annual interest rate.

It can be known from the formula that the interest and time of the simple interest method is a linear function.

The difference between the compound interest method and the simple interest method is that the interest of the previous period is added to the principal of the next period, and the next period of interest is calculated based on the total of the principal and interest. Obviously, when p, i, n are all the same, the amount of interest calculated by the compound interest method is greater than the simple interest method.