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With simple interest the interest is only charged on the original loan. This is least favourable to lenders - if a payment is missed, only interest on the original loan is added. If extra interest is paid off, or an interest payment is missed, the total interest for a year remains the same.
With compound interest, interest is charged on the original loan and [unpaid] interest - each month no repayment is made the interest increases as the interest is effectively added to the loan: lenders like this as they are automatically "re-lending" the unpaid interest.
Complex interest is a type of compound interest in that for the duration of the loan repayments are made so that with each payment, the interest accrued so far is paid off and some of the capital is also paid off. The net effect of this is to reduce the loan outstanding each month so that the amount of interest due each month also decreases - if the same amount is paid back each month over the course of the loan the initial payments are mostly interest and the final payments are mostly loan.
Examples: £5,000 borrowed for 5 years at 10% APR. Loan to be paid off after 5 years.
Simple interest: total interest paid is 5 x £5,000 x 10% = £2,500
Compound interest: (1.1)^5 x £5,000 - £5,000 = £3,052.55
Complex interest: (monthly payment set to clear loan at end of 5 years):
Monthly payment = £5,000 x (1.1)^5 x ((1.1)^(1/12) - 1) / ((1.1^5 - 1) ≈ £105.18
→ Total interest = £105.18 x 12 x 5 - £5,000 = £1,310.80
(this slightly overpays by about 17p due to rounding)
In this case the first payment is £39.87 interest and £65.31 loan, the last payment is 83p interest and £104.18 loan [and 17p excess due to rounding])
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CoachA simple interest is evaluated from the principal value, where in compound interest, the interest is also taken into count. Suppose you have a loan of 1000 for 10% interest and you pay it after three years. In simple interest your total payment is 1300 (1000 + 3 x 100). In compound interest it is 1331 (1000 + 100 + 110 +121).
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What is the formula for difference between simple interest and compound interest?
P(r/100)^2
What is difference between bankers discount and true discount?
The Banker's Gain (BG) is the difference between a banker's discount and a true discount. It is a deduction with simple interest.
What is the difference of simple interest and simple discount?
Simple interest refers to interest that is only paid on principal. Simple discount refers to the amount that is deducted from the amount of the loan.
The difference between the simple and compound interest on a certain sum is Rs250 for two years at 5 percent Pa per annum Find the sum?
simple interst is when you earn interest from your principal but compound interest is when you earn interest from your principal as well as from your previous interest
What are difference between simple pendulum and compound pendulum?
A simple pendulum has one piece that swings. A complex pendulum has at least two swinging parts, attached end to end. A simple pendulum is extremely predictable, while a complex pendulum is virtually impossible to accurately predict.
