Liberal arts math

Explain the difference between simple interest and compound interest. Provide an example of when you would use simple interest and compound interest concepts in real life.

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While it might not seem significant, the differences between simple and compound interest are huge. The concept of simple interest is one that anybody with a car payment or basic loan should be familiar with. When a loan is approved, it often comes with a simple interest rate that basically says you will repay the entire loan plus whatever percent interest that is. If you take out a loan for $100,000 with 5% interest, your final total will be $105,000 when you pay it off. Compound interest is found in credit card balances and is likely the main reason people tend to become overwhelmed with their balances. Depending on your account balance and the APR of your credit card, each month you will be charged interest. The following month, your balance and any accumulated interest is then assessed interest again. What tends to happen when you only pay the minimum amount is that the majority of your payment goes to interest rather than the balance. The result is a balance that seems to never go down despite paying your minimum balance. While it’s important to establish credit for your financial future, everyone must be careful not to get overzealous with spending and ideally pay off your entire balance every month to avoid interest.