- Simple interest is a quick and easy method of calculating the interest charge on a loan. Simple interest is determined by multiplying the daily interestrate by the principal by the number of days that elapse between payments.
- Compound interest (or compounding interest) is interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan. Thought to have originated in 17th century Italy, compound interest can be thought of as “interest on interest,” and will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount.
