Generally, simple interest paid or received over a certain period is a fixed percentage of the principal amount that was borrowed or lent. For example, say a student obtains a simple-interest loan to pay one year of their college tuition, which costs $18,000, and the annual interest rate on their loan is 6%. They repay their loan over three years. The amount of simple interest they pay is: $3,240=$18,000×0.06×3
Compound Interest
It is calculated by multiplying the principal amount by one plus the annual interest rate raised to the number of compound periods, and then minus the reduction in the principal for that year.
