The principal is constant for simple interest. The compound interest offers a comparatively high return. It is the interest which is a % of both principal and accumulated interest. It is the interest on the total principal amount. While compound interest is applicable whenever the interest is up for payment it will be added back to the principal amount.īelow are the top differences between Simple Interest and Compound Interest: Simple interest is applicable for money borrowed for a fixed period of time. The more time your money has to compound and grow, the more you will end up with. To maximise the benefit you can enjoy from a compound interest investment, it’s crucial that you start saving and investing as quickly as possible. So, every day you will earn a new amount based on the interest added to your initial investment. You can also opt for daily interest accrual, which means your interest will be compounded every single day. If the compounding was done on a half-yearly basis, he would end up with ₹ 12,314 and if it was done on a monthly basis, he’d end up with ₹ 12,293. If the interest is compounded annually, he’ll end up with ₹ 12,250 at the end of 3 years. We can understand this better with an example.Let’s say Mr A has made an investment of ₹ 10,000 for just 3 years at a rate of 7%. Compounding will always work best when the interval of compounding is short. You can choose plans where the interest is accrued daily, monthly, six-monthly or annually. When you’re choosing an investment avenue that offers compound interest, you can also look at how often the interest is compounded. But, there’s a way that you can make compound interest work harder for you. When it comes to choosing between simple and compound interest, compound interest will always win. Since the interest-on-interest effect can generate positive returns based on the initial principal amount, it has sometimes been referred to as the snowball effect of compound interest. This way you can pay less interest than what you are liable to pay. To take advantage of compounding, one must aim at increasing their frequency of loan payments. If you are repaying a loan on compound interest, you should not ignore paying the interest or if there is any delay in paying the loan, then the interest burden will be high. The longer you leave your money untouched, the greater it will grow because compound interest grows over time which means your money keeps on multiplying over a period of time. You’ll earn interest on your deposit, and you will also earn interest on the interest you just earned. What happens the following year? That’s where the compound interest comes in. For instance, if you earn a 10% annual interest, a deposit of Rs 100 would gain you Rs 10 after a year. The rate at which compound interest accumulates interest depends on the frequency - higher the number of compounding periods, higher will be the compound interest. This allows your sum and interest to grow at a faster rate compared to the simple interest which is calculated only on the principal amount. It is basically 'interest earned on money that was previously earned as interest'. The interest on a loan or deposit calculated based on the initial principal, and the collective interest from previous periods is called compound interest. Request you consult your financial advisor before making any type of investment. The calculations provided through this calculator shall not directly or indirectly be construed as solicitation of scheme the performance of the scheme. While utmost care has been exercised in preparing this calculator, HDFC Life Insurance Company Limited or its directors, employees, affiliates or representatives do not warrant the completeness or guarantee the accuracy of the information and will not be responsible for any liabilities, losses, damages arising out of the use or in respect of anything done in reliance of the calculator. Kindly do not consider this as an investment advice or direct or indirect solicitation for the product or the performance. The results presented by this calculator are hypothetical and basis the information / inputs provided by you and guides you to plan your retirement and importance of savings for your retirement benefits. It is designed only for information / education purpose. *This calculator is provided to enable you to plan your retirement and aid an estimate for the retirement benefit. HDFC Life Guaranteed Income Insurance Plan
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