Simple INTEREST vs. Compound INTEREST

SIMPLE VS. COMPOUND Interest is basically a percentage of some amount of money. Interest is either:

the amount of money you pay someone for the use of their money (such as for a loan or credit card) the amount that you're paid for the use of your money (such as with a savings account at a bank)

The Two Basic Types Of Interest 1. SIMPLE INTEREST 2. COMPOUND INTEREST

SIMPLE INTEREST 

This type of interest is computed on the principal  –  the amount borrowed  –  for  for the entire length of time of the transaction.

The simple

interest  formula:  formula:

COMPOUND INTEREST  

where: P is the principal (the amount of money involved in the transaction);  r  is the rate of interest (written as a decimal number); and t  is the amount of time (usually in years, if r is the yearly rate).

There’s a better way! Here’s a formula that allows you to find the total amount all in one computation:

  = ( + ) where:  A is the total amount obtained from adding the principal to the interest; P is the principal;  r is the annual rate written as a decimal; and t  is the amount of time (usually in years, if r is the yearly rate).

This interest builds on itself. Money earned in interest for part of the time period is reinvested and used in the computation of interest for the rest of the time period.

The

compound interest  formula:  formula:

     =   +  where:  A is the total amount of money accumulated (principal plus interest); P is the principal (the amount invested);  r  is the rate of interest (written as a decimal number); n is the number of times each year that the compounding occurs; and t  is the amount of time (usually in years, if r is the yearly rate).