What is the Difference Between Simple & Compound Interest?Learn why simple interest is good for borrowers, while compound interest works in your favor as an investor.By Robin Hartill, CFP – Updated Sep 20, 2022 at 3:09PM Show
The difference between simple interest and compound interest is the way the interest accumulates. Simple interest accumulates only on the principal balance, while compound interest accrues to both the principal balance and the accumulated interest. Simple interest works in your favor when you borrow money, while compound interest is better for you as an investor. As a borrower, simple interest is better because you're not paying interest on interest. It's easier to repay debt with simple interest. Compound interest can help you to build wealth over time because your earnings also earn money. What is simple interest?Simple interest is calculated, rather simply, on an annual basis as a percentage of the principal amount. You can compute simple interest by multiplying the principal amount by the annual interest rate and by the number of years for which you invest or borrow money. Simple interest is usually owed on traditional mortgages, car loans, and personal loans. Receiving simple interest as an investor is relatively rare, although investing in bonds entitles you to earn simple interest as long as you own the security. If you borrow $1,000 and pay a simple interest rate of 7% for five years, then you would pay a total of $350 in simple interest on the debt. If you invest $10,000 in a bond that pays a 5% coupon, then you would annually receive $500 until the bond reaches maturity. What is compound interest?When you deposit money into an interest-bearing account, or draw from a line of credit, the interest that accumulates is added to the principal amount. The interest paid or owed is calculated based on both the principal and interest accrued. Interest can be compounded using any time interval. Interest on credit card balances typically compounds daily. If your annual interest rate is 18%, then you are paying a daily interest rate of 0.0493%. Suppose you carry a $5,000 balance. After one day, you'd owe $5,002.47. The next day, you'd owe $5,004.94. Compound interest expenses can add up quickly when you're a borrower, but you can avoid accruing interest on a credit card if you pay the balance in full each month. Compound interest helps you to earn more money when you're saving money in an interest-bearing account. Some common types of accounts that pay compound interest include savings accounts, money market accounts, and certificates of deposit (CDs). Investors can especially benefit from the power of compounding. By reinvesting your portfolio's gains and dividend payments, your money can multiply significantly over time.  Best Stock Brokers for October 2022 Simple interest is preferred by borrowers and rarely paid to investors. Compound interest is a boon for investors and a significant financial burden for those in debt. Simple interest is computed annually on the principal balance at the start of the period, while compound interest can be accrued at any time interval. Focusing on savings and investments, simple interest is more common for different types of accounts or securities than compound interest, and vice versa. Here are some examples that illustrate when simple or compound interest is accrued and how the interest accrues differently:
Related investing topicsWhile investors accept only simple interest from savings accounts, generating compound earnings is necessary to build enough wealth to retire. Avoid owing compound interest on debt in favor of debts with simple interest such as mortgages. Prioritize investments like stocks that enable your gains to compound over time. The Motley Fool has a disclosure policy. Related ArticlesWhat is the difference between compound and accrued interest?simple interest. The main difference between compound and simple interest is as follows: Simple interest is accrued on just the original amount. Compound interest is accrued on the full balance, which is the principal plus any additional interest that has been accrued.
What is the amount difference between simple and compound interest?The major difference between simple interest and compound interest is that simple interest is based on principal amount whereas compound interest is based on the principal amount and the interest compounded for a cycle of the period.
What is the difference between compound interest and simple interest on the amount of Rs 18000 in 2 years with the rate of 10% per year?The difference between the compound interest and the simple interest accrued on an amount of Rs. 18,000 in 2 years was Rs. 405.
What is the difference between the compound interest and simple interest accrued on an amount of Rs 12000 at the end of three years at the rate of 10 %?The difference between the compound interest and the simple interest accrued on an amount at the end of three years at the rate of 12% is ₹381.888.
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The difference between the compound interest and the simple interest acrued on an amount
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