Sunday, March 26th, 2023

Difference between simple and compound interest calculations

The interest rates and calculation methods are crucial points to check whether you borrow or invest funds. The interest rate offered varies between banks. You should explore the market to get the best deal. With investments, the interest rates are likely to be the same for all investors. However, the interest rate for Loans largely depends on your borrowing amount, credit score, and other financial factors.

Interest rates can be calculated in two ways: simple and compound interest. The two methods have unique mathematical formulas. If you are anxious about manual calculations, you can calculate the interest using a compound interest calculator. It is an easy-to-use online tool that provides accurate results within minutes. Let us understand the clear distinction between simple and compound interest calculation methods.

What is simple and compound interest?

Simple interest is the easiest interest calculation method. Here the interest gets calculated on your initial principal amount only. For calculations, you should feed in the principal amount, interest rates, and investment time or borrowing. Compound interest means calculating interest on interest. The outstanding principal amount is for the following year’s interest calculations. Your interest accumulated is likely to be higher.

Let us take a quick example to explain simple and compound interest calculations: Akash has invested Rs. 10,000 in an instrument for a tenure of two years at a 10% interest rate. Following the simple interest formula, his total amount will be Rs. 12,000. In the case of compound interest calculation, his total amount will be Rs. 12,100. Now the difference in the total amount may seem small here.

However, it makes a big difference when significant investments are done. Using an online calculate compound interest tool, you can compute interest on any principal amount. Go online and use the tool to compare investments and borrowing options.

Which calculation method is better: simple vs compound interest?

There is no direct answer. Both interest methods have their pros and cons. It is also the nature of the instrument you opt for to decide whether simple or compound interest calculations are applicable. Compound interest calculations are highly profitable for investment instruments. You can maximise your savings systematically.

The compounding frequency is another factor to consider. The compounding frequency means the number of times the interest gets calculated, monthly, quarterly, semi-annually, or annually. A higher compound frequency works in your favour. With Loans, your primary goal is to attain a lower interest rate. This way, your interest liability reduces irrespective of the calculation method followed.

Maintain a good financial profile to get the lowest interest rate for your Personal Loan. Consider opting for longer repayment tenure as it attracts a lower interest rate. This helps make Loan repayments quickly and affordably.

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