First, you need to know the differences between the two:
Simple interest is only based on the principal amount of a loan, while compound interest is based on the principal amount and the accumulated interest.
Defintion by:
Investopedia
So it is saying that if u have borrowed some money eg $2,000 and the interest on it is 5% for 3 years, Simple interest would mean that u are paying 5% of 2000 each year so that is $100 every year as interest
Compound interest of the same thing would mean that the first year you are paying 5% interest on $2000 but the next year it is 5% interest of 2100, because it is the interest on the initial starting sum and also the accumulated interest. So the third year you are basically paying 5% on $2200.
Formulas for calculating the total amount of interest to be paid over a period of years.
Simple Interest:
Compound Interest:
P stands for Principal Sum, the money you have borrowed.
R is the Interest Rate in %
n is the amount of years invested for.
Purpose of r /100 is to change the % to decimal form.
