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Simple vs Compound Interest
FinanceUnderstand the difference and why it matters.
Simple Interest vs Compound Interest
Understanding the difference between these two types of interest is crucial for making smart financial decisions.
Simple Interest
Interest calculated only on the original principal amount.
I = P × r × t
Interest = Principal × Rate × Time
Compound Interest
Interest calculated on principal + accumulated interest.
A = P(1 + r/n)nt
Comparison Example
$10,000 at 5% for 10 years:
| Type | Final Amount | Interest Earned |
|---|---|---|
| Simple Interest | $15,000 | $5,000 |
| Compound (annually) | $16,289 | $6,289 |
| Compound (monthly) | $16,470 | $6,470 |
When Each is Used
- Simple Interest: Short-term loans, some car loans, bonds
- Compound Interest: Savings accounts, credit cards, mortgages, investments