When you avail of a loan, the lender charges interest on the borrowed amount. Depending on the terms of your loan, this interest may be calculated in one of two different ways – as simple interest (SI) or as compound interest (CI).
While simple interest is charged on an investment or a loan. On the other hand, compound interest is the interest on interest. It gets calculated on the principal amount, as well as the interest of an earlier period. Computation of it is done using the compound interest and simple interest formula. Let’s check out the differences between the simple interests. It also includes the compound interest, including the compound interest and simple interest formula. Read on! What is the formula to calculate the simple interest? The simple interest gets calculated by multiplying the rate of interest for a period by the principal amount and the tenor. The loan tenor could be in days, months and years. Thus, the rate of interest is converted accordingly before multiplying with the amount of the principal and tenor. The simple interest formula is Simple Interest = P*I*N. Here, P is the principal amount, the interest rate for the period and the tenor. What is the formula for compound interest? A = P (1+r/n) ^ (n*t)-1) Here, A = compound interest, P = principal amount, R = interest rate, N = the number of compounding periods and T = number of years (duration/tenor). What are the differences between compound interest and simple interest? The simple interest is the total amount paid to a borrower. It is for using the borrow money online over a fixed tenor. On the other hand, the compound interest earned on the interest on the earlier availed interest and even the principal amount. In SI, wealth grows steadily, and wealth growth is exponential owing to the compounding rate. Lesser ROI is expected compared to compound interest. On the other hand, higher ROI is earned on compound interest.
0 Comments
## Leave a Reply. |
## AuthorAman Khanna is an experienced financial advisor who is well known for his ability to foretell the market trends as well as for his financial astuteness. He has an MBA in finance from Toronto University as well as years of experience delivering seminars on sound financial practices and debt management. |