The interest is the cost of using money. Lenders such as mortgage companies, banks, and credit card companies charge interest for lending money to consumers and businesses. The U.S. government and private companies borrow money from the general public in the form of bonds they issue and pay interest on. Banks and savings institutions pay interest to depositors for the use of their funds. All types of lenders and borrowers either charge or pay interest that is either “simple” or “compound.”
What is the difference between simple interest and compound interest?
Simple interest is calculated only on the original principal, while compound interest is calculated on the original principal plus any unpaid interest.
What does that mean for investors?
Accumulation can have a significant impact on investment outcomes, whether positive or negative. You can use the Rule of 72 to see how small changes in interest rates can make a big difference. If you divide 72 by the interest rate, the result is the number of years it takes for money to double. For example, it takes 24 years for money to double at an interest rate of 3%. It takes 20.5 years at an interest rate of 3.5%.
Conclusion
The difference between simple interest and compound interest lies in when the interest is paid. If the interest is paid when charged, it is simple. If the interest accumulates and is added to the balance, it is compound. Interest that is due daily, monthly, or quarterly is preferable for depositors and lenders. Annual interest is more beneficial for borrowers and savings institutions.
Source: https://www.thebalancemoney.com/simple-vs-compound-interest-what-s-the-difference-5205017
Leave a Reply