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Simple vs Compound Interest
Simple Interest vs Compound Interest
Simple interest is calculated on the original principal only. Compound interest earns interest on accumulated interest.
Comparison Table
| Feature | Simple Interest | Compound Interest |
|---|---|---|
| Formula | I = P × r × t | FV = P × (1+r)^n |
| Interest basis | Original principal only | Principal + accumulated interest |
| Growth pattern | Linear | Exponential |
| Common usage | Short-term loans, T-bills | Savings accounts, bonds, investments |
Key Differences
- →Compound interest grows faster due to interest-on-interest
- →The difference increases with time and rate
- →Most finance problems assume compounding
When to Use Simple Interest
- ✓Very short-term calculations
- ✓When the problem explicitly states simple interest
- ✓Treasury bill pricing
When to Use Compound Interest
- ✓All standard TVM problems
- ✓Investment growth projections
- ✓Loan amortization
Common Confusions
- !Assuming all interest is simple
- !Not converting between APR and effective rate
FAQs
Common questions about this comparison
At 10% over 30 years: simple gives 4x your money; compound gives 17.4x.