Which is better, £3.500, 4 years at 6% simple or compound interest?
To determine whether £3,500 at 6% interest is better with simple or compound interest over 4 years, we need to calculate the interest earned for each type.
1. Simple Interest:
Simple interest is calculated by multiplying the principal amount (£3,500) by the interest rate (6%) and the number of years (4).
Simple Interest = Principal × Rate × Time
Simple Interest = £3,500 × 0.06 × 4
Simple Interest = £840
2. Compound Interest:
Compound interest is calculated by applying the interest rate to the initial principal and accumulated interest over each compounding period. Since the compounding period is not specified, we will assume it is annually.
The formula for compound interest is: A = P(1 + r/n)^(n*t), where:
A = final amount (including principal and interest)
P = principal amount (£3,500)
r = annual interest rate (6% or 0.06)
n = number of compounding periods per year (assuming 1 since it's not specified)
t = number of years (4)
Using the compound interest formula:
A = £3,500(1 + 0.06/1)^(1*4)
A = £3,500(1.06)^4
A = £3,500(1.26248)
A = £4,418.68
The final amount using compound interest after 4 years is £4,418.68.
In comparison, the simple interest calculation gave us £840, while the compound interest calculation resulted in £4,418.68. Hence, compound interest is better than simple interest in this scenario because it provides a significantly higher return on investment.