Simple vs compound interest explained

Simple interest is calculated only on the principal: Interest = P × r × t. It is straightforward and predictable, commonly used in short-term products like some personal loans and bridging finance.

Compound interest is calculated on the principal plus accumulated interest: A = P × (1 + r/n)^(n×t). It grows exponentially. For savings and investments this is beneficial; for loans it means you pay more if interest is capitalised. In South Africa, most credit products use reducing-balance (amortised) repayments, which behaves differently from pure compound interest.