Simple Interest and Compound Interest

Simple interest is a quick way to figure out how much money you owe on a loan. The simple interest formula is used across industries like banking, finance, and automobiles.

What is meant by Compound Interest? 

The interest charged on a loan or deposit is known as compound interest. It is the most often utilized idea in our everyday lives. Compound interest is calculated using both the principal and the interest earned over time. The major distinction between compound and simple interest is this.

If we look at our bank statements, we’ll discover that every year some interest is credited to our account. For the same principal amount, the interest rate changes each year. We can observe that interest has risen in recent years. As a result, we can deduce that the bank’s interest is not simple interest; instead, it is compound interest or CI.

Simple Interest Formula

If you know the principal amount, the rate of interest, and the time periods, you can use the simple interest formula to calculate the interest amount.

The following is a simple interest formula:

                                       SI=PTR100

where

• SI stands for simple interest.

• P stands for the principal amount.

• R stands for interest rate (in percentage)

• T is the duration of time (in years)

Amount (A) is equal to the sum of the principal (P) and interest (I) also it refers to the entire amount of money repaid at the end of the loan period.

In the case of simple interest, the total amount formula can be stated as

                                                       P(1 + RT) = A

here,

• A is the total amount at the end of the specified time period

• P stands for principal or the amount borrowed at the start of the loan.

• R is the interest rate (per annum)

• T is for Time (in years)

Simple Interest Formula For Months

The above formula for calculating simple interest on an annual basis was provided. Let’s look at the formula for calculating monthly interest. If P is the principal amount, R is the annual interest rate, and n is the time (in months), the formula is as follows:

                   (PnR)/ (12 x 100) = Simple Interest for n months

The following is a list of simple interest formulas for years, months, and days when the time period is given in days, months and years:

Compound Interest Formula

Compound interest, is the interest calculated using the starting principal amount and the interest accrued over time. The following is the compound interest formula:

Amount = P (1 + r/n)nt

where,

• A is the amount
• P is the principal
• r is the rate of interest
• n is the number of times interest is compounded per year
• t is the time (in years)

Alternatively, we can write the formula as given below:

                                             CI = A – P

• After a period of compounding, A indicates the new principal sum or the total amount of money.
• The original or initial quantity is denoted by the letter P.
• The yearly interest rate is represented by the letter r.
• The compounding frequency or the number of times interest is compounded in a year, is represented by the number n.
• The number of years is denoted by the letter t.

As a result, the compound interest rate formula can be represented in a variety of ways, such as daily, monthly, quarterly, half-yearly, yearly

Conclusion

Thus, both simple and compound interest comes with their set of advantages and disadvantages from a financial perspective. Hence, it is essential for the person to calculate it well before proceeding ahead.