Why does the insurance companies, banks etc use the compound interest method to calculate the amount of interest instead of simple interest method? As compound interest method shows higher amount of interest as compared to the other one.
Dear student
Simple interest is calculated on the origin, or origin, the amount of the loan. Compound interest is calculated on the deposit of the original period and the previous period, and thus can be considered as "interest on interest".
Interest is calculated on the premises rather than the ordinary base, then there can be a big difference in the amount of interest payable on the loan. On the positive side, when it comes to your investment, the magic of peripherals can work for your benefit and can be an important factor in making money.
However, simple and complex interest are basic financial concepts, being well acquainted with them will help you make better decisions while making a loan or investment, which can save you thousands of dollars during the long term..
Simple Interest
The formula for calculating simple interest is:
Simple Interest = Principal * Interest Rate * Term of the loan
=p*i*n
Thus, if simple interest is charged at 5% on a $10,000 loan that is taken out for a three-year period, the total amount of interest payable by the borrower is calculated as: $10,000 x 0.05 x 3 = $1,500.
Compound Interest
The formula for calculating compound interest in a year is:
Compound Interest = Total amount of Principal and Interest in future (or Future Value) less Principal amount at present (or present value )
=[P (1 + i) n ] – P
=P[(1 + i) n-1]
where P = Principal, i = annual interest rate in percentage terms, and n = number of compounding periods for a year
Continuing with the above example, what would be the amount of interest if it is charged on a compound basis? In this case, it would be: $10,000 [(1 + 0.05)3 – 1] = $10,000 [1.157625 – 1] = $1,576.25.
While the total interest payable over the three-year period of this loan is $1,576.25, unlike simple interest, the interest amount is not the same for all three years because compound interest also takes into consideration accumulated interest of previous periods.
Regards
Simple interest is calculated on the origin, or origin, the amount of the loan. Compound interest is calculated on the deposit of the original period and the previous period, and thus can be considered as "interest on interest".
Interest is calculated on the premises rather than the ordinary base, then there can be a big difference in the amount of interest payable on the loan. On the positive side, when it comes to your investment, the magic of peripherals can work for your benefit and can be an important factor in making money.
However, simple and complex interest are basic financial concepts, being well acquainted with them will help you make better decisions while making a loan or investment, which can save you thousands of dollars during the long term..
Simple Interest
The formula for calculating simple interest is:
Simple Interest = Principal * Interest Rate * Term of the loan
=p*i*n
Thus, if simple interest is charged at 5% on a $10,000 loan that is taken out for a three-year period, the total amount of interest payable by the borrower is calculated as: $10,000 x 0.05 x 3 = $1,500.
Compound Interest
The formula for calculating compound interest in a year is:
Compound Interest = Total amount of Principal and Interest in future (or Future Value) less Principal amount at present (or present value )
=[P (1 + i) n ] – P
=P[(1 + i) n-1]
where P = Principal, i = annual interest rate in percentage terms, and n = number of compounding periods for a year
Continuing with the above example, what would be the amount of interest if it is charged on a compound basis? In this case, it would be: $10,000 [(1 + 0.05)3 – 1] = $10,000 [1.157625 – 1] = $1,576.25.
While the total interest payable over the three-year period of this loan is $1,576.25, unlike simple interest, the interest amount is not the same for all three years because compound interest also takes into consideration accumulated interest of previous periods.
Regards