Simple Interest – It is interest amount calculated on base principal amount. E.g. You have borrowed Rs. 1000 @12% p.a. interest rate for 3 years and you need to pay interest every year. Then you will be paying interest (1000*12% = 120) every year.
Compound interest – Compound interest, or ‘interest on interest’, is calculated with the compound interest formula. E.g. You have borrowed Rs. 1000 @12% p.a. interest rate and you need to pay total amount after 3 years. Then you will be paying interest on interest amount also.
- Compound interest is interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods on a deposit or loan.
- Compound interest is calculated by multiplying the initial principal amount by one plus the annual interest rate raised to the number of compound periods minus one.
- Interest can be compounded on any given frequency schedule, from continuous to daily to annually.
- When calculating compound interest, the number of compounding periods makes a significant difference.