What is the difference between compound and simple interest rate?

4 Answer(s)

Simple interest is interest that is based on the original amount of money that is involved (i.e. the original amount of money deposited in a bank account). Every time interest is added to the account, this is based on the the original sum in the account.

Compound interest adds interest that is based on the current amount in the account. This means that the amount of interest earned will change as the amount of money in the account increases.

For example:
If you deposit $100 into a bank account that earns 2% simple interest at the end of every month, every month the amount in your account will increase by $2.

End of month 1: $100 (original) + $2 (interest based on original) = $102
End of month 2: $102 (current) + $2 (interest based on original) = $104

However, if you deposit $100 into a bank account that earns 2% compound interest at the end of every month, then something different happens:

End of month 1: $100 (original) + $2 (interest based on current) = $102
End of month 2: $102 (current) + $2.04 (interest based on current) = $104.04

Hope this helps!

Simple interest is calculated only on the principal amount of a loan.
Compound interest is calculated on the principal amount and also on the accumulated interest of previous periods, and can thus be regarded as “interest on interest.”

the way they are calculated

simple = calculated in a single step..money times interest rate times days in the period

compound = calculated for stated period, added to principal, then the combined total (principal and interest) is used to compute the next period's interest, and so on, with the increasing balance used time and time again to calculate the interest next due.