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Interest is the cost of borrowing money, where the borrower pays a fee to the owner for using

Simple interest is calculated by multiplying the principal amount by the interest rate and the number of periods in a loan. 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, a student obtains a simple interest loan to pay one year of her college tuition, which costs $18,000, and the annual interest rate on her loan is 6%. She repaid her loan over three years and the amount of simple interest she paid was $3,240 = $18,000 x 0.06 x 3. The total amount she repaid was $21,240 = $18,000 + $3,240.

Conversely, compound interest, is interest on interest. It is calculated by multiplying the principal amount by the annual interest rate raised to the number of compound periods. As opposed to simple interest, compound interest accrues on the principal amount and the accumulated interest of previous periods. For example, if the student introduced above obtained a compound interest loan for college. The amount of compound interest that would be paid is $18,000 x ((1.06)3- 1) = $3,438.29, which is higher than the simple interest of $3,240. This is because unlike the simple interest, the compound interest accrues on both the principal and the accumulated interest.

Go deeper into the amazing concept of compounding here - Investing 101: The Concept of Compounding.

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