Simple vs compound interest
- Simple interest is earned only on the original amount: SI = P × r × t.
- Compound interest is earned on the amount plus the interest already added: A = P × (1 + r ÷ n)^(n × t).
The longer the time and the more often interest is added, the bigger the difference.
Example
₹1,00,000 at 8% a year for 10 years grows to about ₹2,15,892 with yearly compounding, against ₹1,80,000 with simple interest — about ₹35,900 more from compounding.
The other side: debt
Compounding works against you on debt. An unpaid credit card balance compounds every month, which is why carrying a card balance is so expensive and why prepaying a loan early saves the most.