There are two ways one can calculate interest. The two ways are simple interest SI and compound interest SI. Simple interest is basically the interest on a loan or investment. It is calculated on the principal amount. At the same time, CI is the interest on interest.
This article covers the difference between simple interest and compound interest in detail. Simple interest SI is the cost of borrowing. It is the interest only on the principal amount as a percentage of the principal amount. Borrowers will benefit from simple interest as they have to pay interest only on loans taken.
In other words, simple interest is the amount that one pays to the borrower for using the borrowed money for a fixed period. One can easily compute Simple interest by multiplying the interest amount with the tenure and the principal amount. It is simply based on the original contribution amount. Car loans and consumer loans use simple interest while estimating the interest payments.
Even a certificate of deposit uses simple interest to calculate the return from the investment. Borrowers benefit more from simple interest as there is no power of compounding. In other words, there is no interest on interest. However, investors might lose if their investments are based on simple interest. Simple interest is computed by multiplying the interest rate for a period by the principal amount and the tenure. The tenure can be in days, months, or years. Hence the interest rate has to be converted accordingly before multiplying with the principal amount and tenure.
One can use the following formula to calculate the simple interest :. I — Interest Rate for the period. Using the formula of simple interest , we can calculate the interest Ms Devika will earn from the investment. The simple interest should be calculated according to the duration of the investment or loan. As the name suggests, simple interest is the easiest to understand. To calculate simple interest, the percentage rate is applied to the initial amount borrowed or invested and multiplied by the applicable number of years.
Compound interest is more commonly used for loans and investments designed to be in effect for several years. Compound interest accumulates faster than simple interest because it accrues not only on the initial principal amount but also on interest that has already been earned. As a result, the formula is a bit more complex:.
In short, the amount upon which interest accumulation is based is always the principal of the account when using simple interest, while the total account value is used when calculating compound interest.
Annuities are financial products that use an initial contribution to build value over time. A variety of terms lets you choose the guaranteed period and corresponding interest rate that best suits your financial needs, and generous liquidity options allow free access to a portion of the principal once per year beginning in the second contract year to give you the flexibility you need to keep up with changing financial circumstances.
Views Share. Highlights With compound interest, you incur interest on interest Simple interest results in lower interest for loans Reducing balance loan is cheaper than simple interest loan Bajaj Finserv Personal Loan uses reducing balance method.
What is Simple Interest? What is the Simple Interest Formula? What is the Compound Interest Formula? The personal loan features mentioned in this article are subject to updation, completion, revision, verification and the same may change materially based on policy revisions.
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