Difference between Simple Interest and Compound Interest In 2023

Mar 22nd 2024
Finance
Difference between Simple Interest and Compound Interest In 2023

Difference between Simple Interest and Compound Interest, Most of you might have learnt simple interest during our school days. Though most of us didn’t pay careful attention to this mathematic thing, it is actually a very important part of our lives particularly for those who are indulged in investments of any type. Whenever we invest an amount in any financial tools, we expect it to grow and this is where interest rate matters. The higher the interest rate, the better growth our investment accrues. So, if you are looking to invest or already investing in a security, it is necessary for you to understand simple interest and simple interest calculator.

Types Of Interest Rate

There are primarily two types of interest rate – simple and compound. If you are investing money somewhere, the set interest rate would define the maturity amount you would get from another person. If you invest money in a tool that gives returns on the basis of simple interest, you can use the simple interest calculator and determine the maturity amount. In this post, you will get to know everything about simple interest and simple interest calculator.

What Is Simple Interest?

Simple interest can be defined as a type of interest in which the same rate of interest becomes applicable over and again on the main principal amount. Any bank or financial institution where the money is deposited is obliged to pay interest on that amount. The interest applied by the banks can be of several types and one of them is simple interest.

A loan refers to a sum of money borrowed by a person from a bank or other financial institution with a purpose to meet their requirements. Home loans, vehicle loans, education loans, and personal loans are a few examples. The borrower is expected to pay back a loan amount to the bank or financial institution after adding the interest rate.

Simple Interest Formula

What Is The formula For Simple Interest? The calculation of simple interest is done using the below-given formula.

S.I. = (P × R × T)/100, whereas P = Principal, R = Rate of Interest in % per annum, and T = Time

The rate of interest is defined in percentage % which can be noted as R/100, therefore 100 in the formula.

  • Principal: The principal refers to an amount that is initially invested or borrowed from a bank. P stands for the principal.
  • Rate: Rate is the interest rate at which the principle sum is given to a person for a specific tenure like the  rate of interest are 7%, 10%, and 15%. R stands for the interest rate.
  • Time: The amount of time that the principal is bestowed to an individual. T denotes time.

Read More=What Is SIP Calculator And It's Benefits In 2023

How Simple Interest Formula Is Used?

The simple interest formula can be used by a person to determine he needs to pay or get basis the applicable interest rate over a specific time period. It is one of the easiest and fastest way to determine the value of an amount in future basis the applicable interest rate and tenure. Let’s consider following examples of using simple interest calculator.

When The Amount Is Borrowed: Use this formula to determine the amount that needs to be repaid to the lender by applying the annual interest rate. This simple interest formula helps borrowers ascertain the overall amount borrowing cost.

When The Money Is Lended: If a person has offered an amount to another person to get an increased amount by applying the interest rate. Using this Simple Interest formula, a person can easily get the additional income that is accrued the Interest.

When The Money Is Invested: If a person has invested a sum of money in money saving or investment tools like RD, FD, PPF and others, he can adjudge the interest income using this simple interest calculator.

How To Use Simple Interest Calculator?

An easy to use Simple Interest Calculator is the best way for people to determine a future amount that they get or deposit calculated using the amount along with the interest rate. The outcome can be determined in no time after a person enters the principal, rate, and time value.

At a time when there are different types of investments available in the financial sector, this calculator plays a pivotal role by enabling people to easily determine the amount they would get after a certain period of time at a specific interest rate. Similarly, borrowers can determine the overall cost of borrowing an amount by determining the extra amount they would pay.

Some Major Pluses Of Using A Simple Interest Calculator Are:

  • One can calculate the simple interest regardless of the currency. Be it Indian Rupee, US Dollar, Pound, or any other currency, calculating simple interest using a calculator is very easy.
  • A person save great amounts of time by using a simple interest calculator.
  • One can utilize a number of factors available to get a precise estimate of the overall investment. This, in turn, helps in better decision making.
  • Calculating the current worth of money is made easier using a simple interest loan calculator.

Read More About Different Topics-

How To Calculate EMI In Advance And EMI In Arrears?

How To Calculate Personal Loan Interest Rates in 2023?

What Is Compound Interest?

Compound interest is the term used to describe interest that is calculated on both the initial principle and the interest that has accrued over time. It's the interest on interest, to put it another way.

When interest on an investment or loan is compounded, it means that the interest is added to the principal at the conclusion of each compounding period (often monthly, quarterly, or annually), and subsequent interest calculations are based on the updated amount. This causes the value of an investment or the sum owing on a loan to increase exponentially over time.

As it allows for the magnifying of returns or debts over the course of time, compound interest has a substantial impact on the growth of savings or the cost of borrowing.

How to Calculate Compound Interest Formula?

To calculate principal plus interest, this calculator applies the compound interest formula. Given the other known numbers, the same procedure is used to calculate the principal, rate, or time. 


P(1 + r/n)nt = A

  • In the equation
  • A =is the accumulated sum (principal plus interest).
  • P= is the principal sum.
  • R= equals the annual nominal interest rate, as a decimal.
  • R is the annual percentage rate of nominal interest.
  • R= R/100
  • N= is the quantity of compounding periods per second.
  • T= stands for time in decimal years; for example, 6 months are equal to 0.5 years. To acquire the decimal years, divide your partial year's number of months by 12.
  • I= is the interest rate.
  • In= stands for natural logarithm.

Clicke Here To Calculate Compound InterestCompound Interest Calculator

FAQs

1. Is There Any Eligibility Criteria To Use Simple Interest Calculator?

No, there is no such thing. Anyone can use this calculator to determine the interest rate.

2. What Can I Ascertain Using A Simple Interest Calculator?

People can choose to get the interest rate accrued on the principal amount on the invested amount or borrowed amount they have taken on simple interest.

3. Is Simple Interest Really Good?

In general, simple interest is advantageous when borrowing money. It implies that your interest expenses will be less than they would be if the lender charged compound interest. Simple interest, however, is inferior to compound interest if you are investing or saving your money.

The Conclusion

Whether you are borrowing money from a bank or financial institution or investing money in a savings instrument, by using a Simple Interest and Compound Interest Calculator in Delhi, you can easily determine the amount that your endeavor would accrue over a period of time. This is why you can find such a financial calculator on InvestKraft involved into lending and investment.

 

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