First published: 21 January 2022 @ 3:23 pm
Client: Shiirs
Written By: The Big Writer
Published At: Read More
Understanding the world of credit, loans, and managing your personal finances is a lifelong endeavor.
You may have already heard about how beneficial compound interest is, but understanding simple vs complex interest is not always clear.
Today, we’ll dive into the simple interest formula, complex interest, and why compound interest is preferable to simple interest.
What is Simple Interest?
Simple interest is a percentage of the principal amount of a loan or deposit paid. This means that simple interest remains stable over time, compared to its cousin in compound interest.
Thankfully, most student loans are based on simple interest–or else they could extend even further! Many mortgages of 30 years also use the simple interest calculation, allowing you to plan for the interest charges over a number of years. Personal loans with simple interest provide a more stable monthly payment. Simple interest is better for you as a consumer borrowing money, so look for it when making decisions about loans and extended payment plans.
However, this type of interest is not necessarily the best for investments. When it comes to a savings account or other long-term investment, you want interest that’s continuously compounding.
What is Compound Interest?
Compound interest shifts over time. It is calculated using the initial principal and grows with time as interest accrues. This is a big reason that loan repayment plans take care to note whether loans are distributed with simple or compound interest. Compound interest loans will continue to grow while your simple interest loans will remain stable as you pay off the compound loans first before moving on.
If you researching loans or planning on making a significant purchase like a car, you will want to avoid compound interest loans unless you know you will be able to make the payments quickly. When it comes to investments though, you should look for ones that use a compound interest formula.
Why is Compound Interest Preferable to Simple Interest?
When it comes to investing your money, you want sources to calculate the interest with the compound formula. With this method, your funds will grow much faster because the interest is based on the current balance, not just the principal balance. The rate of return is much higher with compound interest, which is why it’s so helpful for investing.
But, for loans, this type of interest benefits the lender. Always make sure to inquire about the way interest works before taking a loan.
Shiirs Can Help
While compound interest is great for investing, it’s much more difficult to calculate. Compound interest calculators can certainly help simplify the process. We have a compound calculator to help you understand how compounding your wealth over time will benefit you in the long run far more than investing in simple interest accounts.
Don’t get caught out without knowing what to do with your money and scrambling to understand with deadlines looming: let Shiirs help you plan ahead. Sign up for Shiirs today!
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