Key Takeaway
Simple interest charges interest only on the principal, while compound interest charges interest on principal plus accumulated interest. Over 20 years, compound interest at 10% earns 3.7x more than simple interest.
1,00,000
8%
10 Yrs
Simple Interest Maturity
1,80,000
Compound Interest Maturity
2,20,804
Compounding Gain
40,804
Divergence of Simple vs. Compound Interest
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Frequently Asked Questions
What is the key difference between simple and compound interest?
Simple interest is calculated only on the principal amount. Compound interest is calculated on the principal plus all accumulated interest. Over time, compound interest grows exponentially while simple interest grows linearly.
Where is simple interest still used?
Simple interest is common in short-term personal loans, car loans, and some government bonds. Most savings instruments, mutual funds, and FDs use compound interest.
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