Simple and Compound Interest Essay Example | Topics and Well Written Essays - 1000 words

Simple and Compound Interest - Essay Example Simple interest is interest expressed as a percentage of principal or the original amount borrowed or lent, for the entire period of borrowing. The interest will be the income received with regard to the lending or the price paid for the utilization of borrowed amount.   Simple interest happens to be the fastest as well as easiest approach of computing the interest on amount borrowed or lend. A car loan is a very popular example of simple interest, with which interest is charged only on the principal or original amount borrowed or lent. Below is the formula utilized in calculating interest owed in simple interest: Compound interest is interest expressed as a percentage of the revised principle.   In other words, compound interest may be referred to as interest added to the principal amount of a loan or deposit in order for the interest added to also earn interest onwards. In this approach, interest earned within the prior periods is added to the initial amount/principal: this inc reases the amount, on which the next period’s interest will be charged. The summing up of the principal amount and the interest is referred to as compounding. In this case, interest has to be paid on principal amount as well as interest accumulated during the deposit or loan term. It happens to be normal for banks to pay interest on semi -annually basis. Financial institutions, on the other hand, have a guiding principle of paying interest on quarterly basis. It is important to understand to how to calculate compound interest.