# What is simple and compound interest? Which one is better?

What is simple and compound interest? Which one is better?

Simple interest is a type of interest calculation that is calculated only on the initial principal amount of a loan or investment.

Compound interest is a type of interest calculation that is calculated on the principal amount and the accumulated interest of a loan or investment.

The amount of simple interest charged is calculated as a percentage of the principal amount, while the amount of compound interest charged is calculated as a percentage of the principal and the accumulated interest.

Simple interest is usually charged on short-term loans and investments, while compound interest is usually charged on long-term loans and investments.

With simple interest, the interest rate remains constant throughout the duration of the loan or investment and does not increase with time.

With compound interest, the interest rate increases with time, meaning the amount of interest charged will increase with each period of the loan or investment.

Generally, compound interest is better than simple interest as it allows the principal amount and the accumulated interest to earn a higher return over the long-term.

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