What is the difference between simple interest and compound interest? Give an example for each one and compare/contrast them.

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ObiQuan ObiQuan

25-01-2017
Business

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What is the difference between simple interest and compound interest? Give an example for each one and compare/contrast them.

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fido0 fido0 · Answer 1 · 2017-01-25T05:10:46+01:00

Interest is the cost of borrowing money, where the borrower pays a fee to the owner for using the owner's money.

Simple interest is only based on the principal amount of a loan, while compound interest is based on the principal amount and the accumulated interest.

For example, a student obtains a simple interest loan to pay one year of her college tuition, which costs $18,000, and the annual interest rate on her loan is 6%. She repaid her loan over three years and the amount of simple interest she paid was $3,240, or $18,000*0.06*3. The total amount she repaid was $21,240, or $18,000+$3,240.

Suppose another student obtains a compound interest loan to pay one year of his college tuition, which costs $20,000, and the annual interest rate on his loan is 8%. Unlike the simple interest, the compound interest accrues on both the principal and the accumulated interest. He repaid his loan over four years and the amount of compound interest he paid was $7,209.77, or $20,000*((1+0.08)^4 - 1) and the total amount he repaid was $27,209.77, or $20,000+$7,209.77.

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xxxCaitlynxxx xxxCaitlynxxx · Answer 2 · 2017-01-25T05:12:05+01:00

Simple interest interest which is charged as a percentage of the original amount lent for the whole borrowing period. So let's say You borrowed $100 from the bank and they want you to pay a one time interest fee of 10%. When paying them back you would give them $110.
Compound interest is the interest which is charged as a percentage.The Original price(interest rate) plus accumulated interest of prior periods. In this method they add up the interest earned in the previous years to the initial price, thus increasing the original amount.