Both methods are explained and compared in detail below. There are two ways interest on a principal amount can be calculated, simple interest and compound interest.
As a student of finances, or someone learning how to budget and handle money, it is essential to understand the concepts of Simple Vs Compounding Interest. Economically speaking, one feasible explanation for the application of interest rates is to acquire a valid source of income for predominantly money-lending institutions and to avoid the scarcity of loanable funds. Conversely, interest can also be considered as the rate paid for money put on deposit. Interest is defined as payment from the borrower to the lender above the actual price of the loan taken, as compensation for the use of money, or for the delay in repayment.
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