answersLogoWhite

0

Simple interest is interest that is compounded solely on what was originally owed. For example, say you owe $500 at 10% annual interest. This means that at the end of the year, you owe $50 dollars in interest (10% of 500) on top of the $500 you already owe. If you were to not pay it again, at the end of the second year you would owe $550 plus another $50 making the total amount you owe to be $600. No matter how long you wait to pay off the debt it will only increase by $50 every year, since that is 10% of the original amount owed.

Compound interest in interest that is compounded on what what was originally owed PLUS any interest left over. Using the example above if the interest on the original $500 had been compound interest by the second year one would have owed $550 plus an additional $55 dollars in interest (10% of 550). This is the danger of compound interest as it always increases as long as the debt continues to be unpaid.

User Avatar

Wiki User

12y ago

Still curious? Ask our experts.

Chat with our AI personalities

ProfessorProfessor
I will give you the most educated answer.
Chat with Professor
FranFran
I've made my fair share of mistakes, and if I can help you avoid a few, I'd sure like to try.
Chat with Fran
DevinDevin
I've poured enough drinks to know that people don't always want advice—they just want to talk.
Chat with Devin

Add your answer:

Earn +20 pts
Q: How does a compound interest differ from a simple interest?
Write your answer...
Submit
Still have questions?
magnify glass
imp