Difference between Simple & Compound Interest at Algebra Den

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Home >> Simple Interest >> Difference between Simple & Compound Interest >>

Difference between Simple & Compound Interest

Amount Compound Interest Difference between Simple & Compound Interest

Before you understand this differentiation, you are advice to read:

What is Simple Interest ?
What is Compound Interest ?

In simple interest , interest is calculated on the principal irrespective of number of years while in Compound Interest interest is added after every one year to form a new principal.

Example : Find Interest to be repaid on a loan of $10000 for 3 years at rate 10% interest per annum ?
Solution: Here we calculate both simple interest and compound interest

Observe the following table:

1 Year Calculation
Simple Interest Compound Interest
Principal $10000 $10000
Interest $1000 $1000
2 Year Calculation
Simple Interest Compound Interest
Principal $10000 $11000
Interest $1000 $1100
3 Year Calculation
Simple Interest Compound Interest
Principal $10000 $12100
Interest $1000 1210
Total Interest After 3 Years
$3000 $3310

You can observe that the interest paid in case of simple interest is $3000 while interest paid in case of compound interest is $3310.
And there is difference of $310 in payment of interest calculated with simple interest and compound interest.