Money basics3 min read · Updated 21 October 2026
Simple vs compound interest: the formula and the difference
How simple and compound interest work, with both formulas, a ₹1 lakh example over 10 years, and which one banks and lenders use for loans.
Simple interest
Interest is charged only on the original amount. ₹1,00,000 at 8% for 10 years: 1,00,000 × 8 × 10 ÷ 100 = ₹80,000.
Compound interest
Interest is added to the amount, then earns interest. The formula is A = P × (1 + R/100)T. Same example: A = ₹2,15,892, so the interest is ₹1,15,892.
The gap grows with time
In the example, compounding adds ₹35,892 over simple interest. The longer the time and higher the rate, the bigger the gap.
In loans
Home and car loans are on reducing balance: interest is on what you still owe. Watch for flat-rate offers, which charge interest on the full original amount for the whole term.
Common questions
What is the formula for simple interest?
Principal × rate × time ÷ 100.
What is the formula for compound interest?
Amount = principal × (1 + rate/100) to the power of years. Interest is amount minus principal.
Which is better for me?
Compound for savings, simple for borrowing.