The Differences between Simple and Compound Interest is given here. Knowing the difference between simple interest and compound interest is necessary to understand the economic movements that we are going to make or plan to make.
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Simple interest
It is the interest or benefits that a company obtains from an investment that it has made or sold and that can be financial or capital when the interest produced during each period that the investments last is due only to the initial capital since the benefits are withdrawn after the expiration of each period.
This means that the interest is only calculated on the principal or initial amount, not on the productive capital or the profits.
The concept of interest is related to the price of money. If a loan is requested, a certain interest must be paid on that money. If you deposit money in a bank, the bank must pay a certain interest on that money.
Simple interest is calculated and paid on the initial capital that will remain unchanged.
Several parties are involved in this business:
Capital: It is nothing more than the initial amount of money, which we loan, invest, or deposit.
Rate: It is the amount of money that is paid for each 100% of the capital.
Time: It is the time during which the money will earn interest.
Interest: It is the amount of money that will be charged or paid for the use of the capital during the time.
Compound interest
Represents the accumulation of interests that have been generated in a certain period of time by an initial capital at an interest rate during certain periods of taxation. In this way, the interests obtained at the end of each investment period are not withdrawn but are reinvested or added to the initial capital, that is, they are capitalized.
It is the interest rate that is charged for a loan and that when settled is accumulated to the capital, so in the next settlement the previous interest will form part of the capital and will be a basis for calculating the new interest.
suggested video: Simple vs Compound Interest
Differences between Simple and Compound Interest
- Simple interest is the profit that is calculated based on a percentage of initial capital. The profit it generates is withdrawn, that is, it is not reinvested in the initial capital.
- Compound interest represents the cost of money and the profit or profit of initial capital at an interest rate during a period during which the interest obtained at the end of each period is reinvested and added to the initial capital producing a final capital.
