Simple and Compound Interest: Which is better?

Sumaiya Tasnim Adiba

Interest rate, also cited as ‘Annual Percentage Yield (APY) while speaking in a more aristocrat manner, is what propels the entire realm of finance and banking. Let it be the bank borrowing the investor’s principal balance for operational purposes or the lender taking a loan from the bank for certain causes, interest or the expense of borrowing builds capitals, industries and refurnishes the economy. The sole savior for both investors and financial institutions – this is where everyone’s on the same side.

Interest, however, can be different in methods and forms. In usual scenarios, interest rates can be of two fundamental types – ‘Simple Interest’ or ‘Compound Interest’. We all are pretty much well aware of these two terms but in case you don’t, hone up your knowledge otherwise you’ll be making a fool of yourself in your future financial endeavors. ’Simple Interest’ generally refers to a specific annual rate set on the principal amount of loan or deposits by the bank whereas ‘Compound Interest’ is calculated in the accumulation of both principal and interest. 

But how do they differ and which of them is the appropriate one for your bank? Confused enough? Well, we are here to help.

Not all banks possess the same economic condition or focus and obviously, each bank has different grounds of functionality. You have to choose what’s best for your institution according to the way you work. If your bank is highly dependent on your consumer’s deposited amounts, you’re most likely to charge high-interest rates for borrowers. Also, if your prime focus is not on that arena, your interest rates should be less as you have a higher level of reliance on other forces: sales, marketing, etc. The trick of choosing the best option is wholly on you and the way your bank functions.

It’s most convenient that investors will choose banks that offer higher interest rates for a conceivable period of time. Your mode of service as well as the reputation and profit margins of your bank highly depend on how you tackle this aspect. 

So brainstorm, supervise, and implement what’s finest for you. Buckle up and get to the battleground of prominence! Because hey, it’s of no doubt that the road is shaky and the competition of this decade is higher than ever before.

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