Compound Interest vs Simple Interest: Key Differe
Simple interest and compound interest are two different ways of calculating returns or interest charges. The difference between them grows dramatically over time — here is exactly how.
Simple InterestvsCompound Interest
| Factor | Simple Interest | Compound Interest |
|---|---|---|
| Formula | I = P × r × t | A = P × (1 + r/n)^(n×t) |
| Interest calculated on | Principal only | Principal + accumulated interest |
| ₹1L at 10% for 10 years | ₹2,00,000 | ₹2,59,374 (annual compounding) |
| ₹1L at 10% for 20 years | ₹3,00,000 | ₹6,72,750 (annual compounding) |
| Common in | Some personal loans, short-term bonds | FDs, savings accounts, mortgages, investments |
| Frequency matters? | No | Yes — more frequent = more interest |
| Borrower prefers | Simple (pay less) | Compound (pays more over time) |
| Investor prefers | Less growth | Compound (earns more over time) |
Our Verdict
Compound interest is almost always more beneficial for investors and more costly for borrowers — especially over long periods. When comparing savings products, always check compounding frequency (monthly vs annual). When comparing loans, check if interest compounds (credit cards do; most home loans use reducing balance which is similar to compounding).