Principal refers to the original amount of money that is borrowed or invested, while simple interest is the percentage of the principal that is charged or earned as the cost of borrowing or investing. In other words, principal is the initial amount and simple interest is the additional amount that is either paid or earned on top of the principal.
Simple interest is calculated by multiplying the principal by the interest rate and the time period. The formula for simple interest is I = PRT, where I is the interest, P is the principal, R is the interest rate, and T is the time period.
Simple interest is calculated on the principal amount only, while compound interest is calculated on the principal amount and the accumulated interest from previous periods. This means that with compound interest, the interest earned each period is added to the principal, and then the interest for the next period is calculated on the new total. This results in a higher overall interest earned compared to simple interest.
The main advantage of simple interest is that it is easy to calculate and understand. It also tends to be more beneficial for borrowers, as they only pay interest on the original amount borrowed and not on any accumulated interest. It is also useful for short-term loans or investments, as the interest does not compound over time.
While simple interest is commonly used for short-term loans or investments, it can also be used for long-term ones. However, for long-term loans or investments, compound interest may be more beneficial as it allows for a higher overall return. It is important to consider the time period and interest rate when deciding whether to use simple or compound interest.