What is the difference between compound interest and simple interest?

2 Answers

1. 
   

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   In Simple Interest, the int* is cal* on the same rate every year on the amt* but in Compound Interest, the int is cal on the left amt not on the original amt.
   Suppose,
   1. Simple Interest -
   amt is Rs.10,000 and int rate is 5%, then int will be allowed every year on 10,000 only at 5%.
   2. Compound Interest -
   amt is Rs.10,000 and int rate is 5%, then int will be allowed Rs. 500 in first year and in next year i.e. second year, int will be allowed only in Rs.9500 and the chain goes on…

   * int = interest, cal = calculate, amt = amount

   Answer by Shrishti Arora 567 days ago

2. 
   

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   Shrishti almost got it right.

   Simple interest only pays interest on the original principal (virtually no one does this anymore). For example, you deposit $10,000 at 5% interest, your interest will be $500 per year; and you do not earn interest on the interest your earned.

   Compound interest pays interest on the original principal plus the earned interest.
   For example, you deposit $10,000 at 5% interest, you interest will be $500 the first year, then $525 the second year ($10,500 x 5%), and $551.25 the third year ($11,025 x 5%), etc. This assume annual compounding and fixed interest rate. Modern day banks usually compound daily or monthly, so the calculation is more complicated.

   Answer by pinyo 567 days ago