Types of Interest

Types of Interest

There are basically two types of interest

1. Simple Interest
2. Compound Interest

Simple Interest :- This interest is calculated on the bases of initial amount of investment. In simple interest the amount of interest remain constant.

Advantage of Simple Interest :-

Easy to calculate :- The simple interest is relatively easier to calculate than compound interest. for example the amount of $ 100,000 deposit at the rate of 12% for 10 year. The depositor will get 12,000 at the end of each year  and total interest income of the depositor for 10 year is 120,000.This is very simple to calculate the interest for one year and then apply this for whole period. it is not only easy to calculate but also easy to understand.


Commercial bank love Simple Interest :- The commercial bank love the simple interest as unlike the compound interest the amount of interest is not included in the future calculation of interest. The commercial bank has to pay less amount to the depositor as compare to the compound interest and this have positive impact on the profitability of the bank because interest payment is basically a cost for the bank.


Compound Interest :- This interest takes into account both investment and interest earned on the capital. The amount of interest is change with each passing period and each period interest is added to investment to calculate next period interest.


Advantages of Compound interest:-


Investment is growing with incremental rate :- The interest amount is included in the calculation of the interest for next period. This process is very beneficial for depositor . The real advantage of compound interest is visible in long term investment. as the investment period increases the interest amount is growing substantially.