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What is the difference between a compound and simple interest on a loan?

April 26, 2017Business compound difference Finance Investing loan simple

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What is the difference between a compound and simple interest on a loan?

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Compound interest is where you pay interest on the interest. For example, you have a credit card at rate of 10%, with a balance of £1000. With the interest, the balance has risen to £1100. Then, next time, instead of another £100 payable in interest, it is £110 because you include the total sum rather than the original sum. Therefore, simple interest is: Take out credit card at rate 10%, balance £1000, 1st year pay £100, 2nd pay £100, 3rd pay £100.