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Before we jump into simple or compound know interest is the cost of borrowing money. Suppose you took a loan from a bank for a definite period, the bank would impose a percentage of interest on it, and you’ll have to give back the amount you borrowed as well as the interest. In simple terms, interest is a sum given to the lender as a reward. Compound and Simple interest are two types of interest. Both compound and simple interest work differently. Compound and simple interest differ in terms of formulas.
Definition Of Simple Interest
As per the definition of simple interest, simple interest calculates the total amount of money to be paid as interest. The original principal amount is constant over the allotted period, as well as the amount of interest according to the percentage of interest—each time, you have to pay the same amount again and again. Therefore, even though there is no profit, simple interest is preferred more than compound interest by ordinary people.
Definition Of Compound Interest
The definition of compound interest goes like compound interest is the interest you earn on interest. Initially, the investments show no growth but gradually, the account flourishes. Compound interest is dynamic as each time you make a different sum, the original principal amount keeps on upgrading itself.
Simple and Compound Interest Formula
Simple interest and compound interest are easy to calculate. Following are the simple and compound interest formula:
Simple Interest
S.I. = P x R x T / 100
S.I. = Simple Interest
P = Principal Amount
R = Interest Rate
T = Time
A = S.I. + P
A = Final Amount
S.I. = Simple Interest
P = Principal Amount
Compound Interest
Formula when compounded annually/yearly.
A = P (1 + R/100)^n
A = Final Amount
P = Principal Amount
R = Interest Rate
n = Number of Years
Formula when compounded half yearly.
A = P (1 + R/200)^2n
A = Final Amount
P = Principal Amount
R = Interest Rate
n = Number of Years
The formula for computing Compound interest.
C.I. = A-P
A = Final Amount
P = Principal Amount
C.I. = Compound interest
Simple Interest Formula Example
Example 1: Your uncle borrowed ₹80,000 from the bank at the interest of 4% for two years. Find the S.I.
Answer: Given,
P = 80,000
R = 4
T = 2
S.I. = P x R x T / 100
S.I. = 80,000 x 4 x 2 / 100
S.I. = 800 x 4 x 2
S.I. = ₹6,400
Example 2: Your mom paid a simple interest of ₹25,000 while the total amount was ₹1,50,000. Find the principal amount.
Answer: Given,
S.I. = 25,000
A = 1,50,000
A = S.I. + P
1,50,000 = 25,000 + P
1,25,000 = P
Therefore, P = ₹1,25,000
Compound Interest Formula Example
Example 1: I invested my savings of ₹5,00,000 in a bank on the interest of 7% for the period of 3 years. Find Compound interest.
Answer: Given,
P = 5,00,000
R = 7
n = 3
A = P (1 + R/100)^n
A = 5,00,000 (1 +7/100)^3
A = 5,00,000 (0.21)
A = 1,05,000
C.I. = A-P
C.I. = 105,000 – 5,00,000
C.I. = ₹3,95,000
Example 2: A town had a population of 30,000 people in 2018. The population is decreasing at the rate of 3% yearly in this area. What would be the population in 2020?
Answer: Given,
P = 30,000
R = 3
n = 2
A = 30,000 (1 -3/100)^2
A = 30,000 (1 -0.03)^2
A = 30,000 (1.94)
A = 2,19,041 people
Conclusion
Compound interest if used correctly can make you, and if not, it can break you. Simple interest, on the other hand, is a convenient and essential way to borrow and lend money. Simple interest is really easy to calculate when compared to compound interest. Compound and simple interests also have different objectives in different fields. Simple interest tends to be used in our everyday lives more than compound interest. Compound interest is, however, used for business purposes, investments, and multi-millionaire transactions as they extend over for multiple years.
