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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.

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