The key difference between simple interest and compound interest is that simple interest is based on the principal amount whereas compound interest is based on the principal amount and interest compounded over a period of time.
We know that simple interest and compound interest are two important concepts widely used in financial services, especially banking. In this article, CashBerry and you discuss and compare simple interest and compound interest to make the right choice in saving, investing or borrowing capital.
When borrowing installment loans , car loans , education loans , mortgage loans , people often use simple interest. Most people often use compound interest when saving. Why is there such a difference, and why is compound interest becoming more and more popular and appreciated?
Learn about simple and compound interest
Simple interest
What is simple interest?
Simple interest is the interest rate on loans calculated on the basis of the original loan. This implies that interest costs increase over time in a linear fashion. For example, if the initial loan is 1 million VND with an interest rate of 10%, then after year 1, the total interest and principal equals 1, 1 million dong, in the second year, the total profit and capital is 1.2 million dong,...
Formula for calculating simple interest
SI = P0 xixn
In there:
 SI: is simple interest
 PO: is the principal amount
 i: is the oneterm interest rate
 n: is the number of interest periods
The amount obtained after n deposit periods is:
Pn = P0 + P0 xixn = P0(1+ ixn)
To understand how to calculate compound interest , please refer to the examples below.
For example, a person deposits 10 million dong into an account that periodically calculates simple interest at an interest rate of 8%/year.
After 10 years, the amount of principal and interest that person has earned is 10+ 10x 0.08 x10= 18 million dong.
Example 1: A person deposits 10 million VND in a bank with a deposit term of 3 months, the interest rate is 1%/month. When it is due, how much money will the person receive?
Answers:
– Interest rate 1%/month The interest rate for 1 period is 1% x 3 = 3%
– The profit that person receives is 10 x 1% x 3 = 0.3 (million VND)
Conclusion: So when it is due, that person will receive an amount of 10.3 million VND; in which the principal is 10 million dong and the interest received after 1 interest period (3 months) is 0.3 million dong.
Example 2: A person buys government bonds with the amount of VND 100 million, the interest rate is 10%/year, the term is 3 years. Determine the total interest the person receives after 3 years (knowing that bond interest is paid once a year).
Since bond interest is received once a year, interest is calculated using the simple interest method.
Answers:
– Interest received at the end of the first year: 100 x 10% = 10 (million VND)
– Interest received at the end of the second year: 100 x 10% = 10 (million VND)
– Interest received at the end of the third year: 100 x 10% = 10 (million VND)
– Conclusion: So the total profit received by investors after three years is: 10 + 10 + 10 = 30 million
Or it can be calculated as follows 10 x 10% x 3 = 30 (million VND)
Compound interest
What is compound interest?
Compound interest is a commonly used concept in economics. People can understand compound interest as interest arising when loan interest is added to the principal amount, which means that when it is time to pay interest, interest will be added to the principal and start investing to get the amount. profits are higher. With the same principal, you can get more out of compounding.
Formula for calculating compound interest
The most basic of the method of calculating compound interest is as follows:
FV = PV(1+i)ⁿ
In there:
 FV  Future Value: future results
 PV – Present Value: current achievements
 i – Interest Rate: interest rate in the period
 n  number of interest periods
For example: If you deposit 100 million VND in a bank with an interest rate of 7%/year, if you calculate it according to simple interest, after 5 years you will receive 100 * (1 + 7% * 5) = 135 (million VND). This amount will be higher, 100*(1+7%)^5 = 140.3 (million VND) when you use compound interest method.
So, when to use simple interest and compound interest ?
The difference above shows us that the amount received after investment depends not only on the amount of capital spent but also greatly influenced by how interest is calculated. Compared with simple interest, compound interest proves to have the magic power of providing greater return on the same investment.
What is the difference between simple interest and compound interest ?
Through the comparison table below, you can see how compound interest and simple interest differ .
Comparison table of simple and compound interest

Simple interest 
Compounding 
Define 
Is the interest rate on loans calculated on the basis of the original loan amount. 
Is the interest rate incurred when the loan interest is added to the principal amount, that is, when the interest payment period is due, the interest will be added to the principal and start investing to get a higher yield of interest. 
Recipe 
SI = P0 xixn 
FV = PV(1+i)ⁿ 
Amount returned 
The yield is much lower when compared to compound interest. 
Profit is higher than simple profit. 
Principal amount 
The original amount remains unchanged. 
The principal amount continues to change over the entire loan term. 
Evolution 
The growth is still pretty even in this method. 
The development increases quite rapidly in this method. 
Calculate profit 
Interest is calculated on the principal amount. 
The interest charged to it is the principal and the accrued interest. 
difference between compound interest and simple interest is that simple interest is calculated based on the principal amount or loan amount. Whereas, compound interest is calculated based on the principal amount as well as the interest accrued for a certain period or previous period.
It can be seen that time is an important factor to create a huge profit. If you deposit compound interest from a young age, when you retire, you already have a fairly large reserve.
Above are the basic analysis of simple and compound interest that you can update to increase your knowledge capital. Need to learn more, you can refer to the articles on the Blog section of the website cashberry.vn . CashBerry  an online financial consulting unit, supporting quick loans 24/7.