What is the difference between simple interest and compound interest?

In the context of financial transactions, simple interest and compound interest are two different methods of calculating the interest on a loan or investment.

Simple Interest: Simple interest is calculated only on the principal amount of the loan or investment. It does not take into account any interest that has already been earned or paid. The formula for calculating simple interest is:

Simple Interest = (Principal amount) x (Interest rate) x (Time period)

Compound Interest: Compound interest, on the other hand, takes into account not only the principal amount but also the accumulated interest over time. This means that the interest is added to the principal at regular intervals, and subsequent interest calculations are based on the updated amount. Compound interest allows for the potential growth of the investment over time. The formula for calculating compound interest is more complex:

Compound Interest = (Principal amount) x [(1 + Interest rate)^Time period] Principal amount

In simple terms, compound interest allows for the compounding or reinvestment of interest, resulting in the growth of the investment over time. It is generally more advantageous for longterm investments as compared to simple interest.

It's important to note that the specific terms and conditions of interest calculation may vary depending on the financial institution, type of investment, or loan agreement. It's advisable to consult with the respective financial institution or refer to the terms and conditions for precise details on interest calculation methods used in India.