Credit and Loans

Question 8 • 2027 Ignite Financial Literacy-Personal Finance - EL3403

Which describes the difference between simple and compound interest?

Answer

Simple interest is paid on small, short-term loans, while compound interest is paid on large, long-term loans.

Simple interest is paid on the principal, while compound interest is paid on the principal and interest accrued.

Simple interest is paid on large, long-term loans, while compound interest is paid on small, short-term loans.

Simple interest is paid on the principal and interest accrued, while compound interest is paid only on the principal.

Explanation

Simple interest is calculated only on the original amount borrowed or invested, called the principal. Compound interest is calculated on the principal plus any interest that has already accrued, so interest can earn further interest. Therefore, choice B correctly describes the difference.

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