Simple interest is calculated on the principal, or original, amount of a loan. Compound interest is calculated on the principal amount and also on the accumulated interest of previous periods, and can thus be regarded as "interest on interest." We know that simple interest and the compound interest are the two essential concepts widely used in many financial services, most especially in banking purposes. Loans such as instalments loans, auto loans, educational loans, mortgages use simple interest. The compound interest is used by most of the savings account as it pays the interest. It pays more than the simple interest. The simple interest formula is I = P x R x T. Compute compound interest using the following formula: A = P (1 + r/n) ^ nt. Assume the amount borrowed, P, is $10,000. The annual interest rate, r, is 0.05, and the number of times interest is compounded in a year, n, is 4.