# What’s the Difference Between Compound and Simple Interest, And How Does it Work?

The interest rate is computed on the loan or investment. Interest may be computed in two ways. Simple interest (SI) and compound interest are the two methods (CI). The interest on a loan or investment is referred to as simple interest. It is based on the principle. Compound interest is interest computed on interest at the same time. It is based on both the principle and the interest from the preceding period.

## FD Calculator

A fixed deposit’s interest is calculated in two ways: simple interest and compound interest.

## What exactly is simple interest?

The cost of borrowing is defined as simple interest (SI). It is merely interest on principle as a percentage of principal. Borrowers will gain from simple interest since they will only have to pay interest on loans they have taken out. In other terms, simple interest is the amount paid to the borrower for the use of borrowed funds over a certain period of time.

When calculating interest payments on the car and consumer loans, basic interest is used. Even a certificate of deposit calculates the return on investment with simple interest and best for senior citizens in order to get senior citizen FD rates

## Simple interest formula

Before talking about difference between compound and simple interest , Simple interest is calculated by multiplying the period’s interest rate by the principle amount and tenure. The length of service may be measured in days, months, or years.

P*I*N = simple interest

Where,

P denotes the principle amount, while I denotes the period’s interest rate. The letter N represents tenure.

Example:

Let us look at an example of basic interest. Ms. Devi deposits INR 1,000,000 in a three-year fixed deposit at a 7% interest rate.

## Employing the formula

Simple Interest = INR 1,000,000 * 7% * 3 Years

21,000 rupees in simple interest

It should be noted that the greater the sum, the greater the interest. Also, the higher the interest rate, the longer the investment lasts.

## What exactly is compound interest?

Compound interest (CI) earns interest on previously earned interest, as opposed to simple interest, which earns interest just on the main amount. The interest is applied to the principal. CI stands for “interest on interest.” The whole concept relies on producing significant returns by compounding interest on the main amount.

Compound interest accelerates the growth of investments since it is dependent on the principal’s power.

## The compound interest formula

CI is determined by multiplying the principle amount by one plus the interest raised to the power of the compounding periods. Finally, to calculate the CI, deduct the main amount.

To compute compound interest, use the following formula:

(n*t)-1) A=P(1+r/n)

Where A denotes compound interest, P is the principal amount, r is the interest rate, n is the number of compounding periods, and t is the number of years (duration).

## Example:

Let’s look at an example of CI calculations and find difference between compound and simple interest, Mr. Chinar makes a five-year investment of INR 10,000 at a 10% interest. The CI may be calculated using the formula.

A = 10000*((1+10%)^(5)-1)

A = INR 6,105.

Mr. Chinar earned INR 6,105 in interest. At the conclusion of his investing period, his corpus is INR 16,105. (the principal and the interest). The simple interest rate for the same investment and duration, on the other hand, is INR 5,000. The difference in quantities between SI and CI is 1,105 INR. Thats how FD interest calculator works

## Senior Citizen Savings Account Rates

Senior citizens often seek secure investing alternatives that assist them to safeguard their cash while also providing a guaranteed income.

Here is where senior citizen fixed deposits come into play. Senior citizen fixed deposit programs are savings plans that provide a set rate of return on your deposits.

Thus, fixed deposit programs are an appealing investment option for older persons since they give investment security and guaranteed returns.