Both simple and compound interest describe how money grows over time — but they work very differently. Understanding the distinction is essential for anyone who borrows money, saves, or invests.
📐 Simple Interest Formula
SI = P × R × T / 100 where P = Principal, R = Rate per annum, T = Time in years.
📐 Compound Interest Formula
A = P × (1 + R/n)^(n×T) where n = compounding frequency per year. CI = A – P.
📊 Side-by-Side Comparison: ₹1,00,000 at 10% for 10 Years
| Year | Simple Interest Balance | Compound Interest Balance |
|---|---|---|
| 1 | ₹1,10,000 | ₹1,10,000 |
| 3 | ₹1,30,000 | ₹1,33,100 |
| 5 | ₹1,50,000 | ₹1,61,051 |
| 10 | ₹2,00,000 | ₹2,59,374 |
| 20 | ₹3,00,000 | ₹6,72,750 |
💡 When is Simple Interest Used?
- Short-term personal loans and vehicle loans (sometimes)
- Treasury bills and some government bonds
- Gold loans and pawn shop lending
🏦 When is Compound Interest Used?
- Fixed Deposits and Recurring Deposits (compounded quarterly)
- Home loans and most long-term bank loans (reducing balance = compound)
- Credit card outstanding balances (compounded monthly — very costly!)
- Mutual funds and all market-linked investments
🧮 Try Both Calculators
Use our Simple Interest Calculator and Compound Interest Calculator to compare both scenarios with your own numbers.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Consult a qualified financial advisor for personalized guidance.
