Simple interest vs Compound interest

[high oracle]

Hello, I did a quick google search when it comes to simple interest vs compound interest.

From what I've understood, simple interest is a fixed interest we pay at the end of each year until maturity date.

Compound interest on the other hand is not fixed. This is where I'm a bit confused. Each time, what is the new amount considered for the interest to be paid?

Can someone explain how these 2 stuff work in real word pls. Also, I don't really remember the formulas, is there a way where we can just derive things out? Like using proportion?

[opal nymph]

I'll give an example for both

simple interest

Les say you deposit 1000 cash in a bank with 10% interest rate yearly
And after one year,you will get 100 cash additional and if we include the initial amount
You will have a total of 1100 cash,and the next year,you will get 10% of THE first ever deposit you did,that is 1000,so another 100,
Now you will get additional 100,and the total now will be 1200
And this repeats

compound interest

Les say you deposit 1000 cash in a bank with 10% compound interest,after one year,your total balance will be 1100? Right
But how this differs from simple interest is,in the second year
You will get 10% of what the current balance is,that is from 1100 cash
And you will get 110 additional,so the total will be now 1210
And this repeats

[high oracle]

yeah I see, when we say our balance, do we refer to our own balance or the one of the bank?

When it comes to calculating interest, the calculation logic is like:

We have $1000 (principal)
We have an interest rate (10%)
We have a due date (3 years)

So interest would be 10 % of 1000 over 3 years.
So interest paid will be $300?
Total to be paid is $ 1000 + $300 = $1300 ?

[outer parcel]

in summary - simple interest only adds interest using the inital value of the money. compund interest adds interest based on the most recent value of the money

[high oracle]

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