Introduction
The expense of obtaining money, such as the interest added to a loan debt, is known as interest. Moreover, as in a deposit certificate, the value charged for funds at interest may also be considered interest. In this sense, two techniques to compute interest are simple and compound.
However, ethical concerns may arise in these two computations. Even if the mathematics of interest is correct, billing computation and revealing interest or credit cost are often marked by deviations that raise ethical problems. Therefore, this research aims to give an in-depth ethical examination of the parallels and differences between simple and compound interest.
Compound Interest (CI)
Compound or compounded interest is calculated depending on the loan’s original principal and its accrued interest from previous times, typically in years. CI is an accumulation and is thus included in the cumulative interests of prior periods (Sonin & Whitmeyer, 2020). Conversely, CI includes interest on interest and is calculated using a formula. It entails A = P((1+i)^n −1), in which a = prospective value of original investment (including interest), P = initial primary balance, r = interest rate, t = the number of times, and n = the number of times interest is compounded per time (Sonia & Whitmeyer, 2020).
For instance, if $50,000 is placed into a savings account with a yearly interest rate of 10% that is compounded regularly, the investment’s worth after 5 years may be calculated as follows: P= $50,000, r= 10/100= 0.10 (decimal), n= 12, and t= 5. By putting these values into the formula A = $50000((1+0.05)^5 −1), we get A = 50,000 (1 + 0.05)^5 −1 = $13,814.07813.
Simple Interest (SI)
The simple interest formula is a numerical technique for calculating the interest due on a loan. According to Mansa (2022), SI is obtained by multiplying the everyday interest rate by the loan’s principal and the days between repayments. It suggests that SI is a set percentage of a loan’s principal amount. The method of calculating simple interest is SI = P r n, where P is the original amount, r is the yearly interest rate, and n is the time required to repay the loan, mostly in years (Mansa, 2022).
For instance, if James took out a $72,000 simple-interest loan with a yearly return of 5% and decided to return the loan in 2 years, the sum of SI due after 2 years would be estimated as described by the equation: SI = P r n = ($72,000 and 0.05 and 2) = $7200. Consequently, Peter’s overall loan payment would be $72,000 plus $7200.
Similarities in Simple Interest and Compound Interest
Importantly, despite compound interest and simple interest displaying unique variations, there is also a commonality between the two calculation methods. According to Sonin and Whitmeyer (2020), compound and simple interest approaches result in a long-term impact on the money that is either saved or borrowed.For instance, if one keeps cash as a credit balance in a savings account throughout the year, that amount will be greater at the end of the year than at the outset of the year. When it comes to savings, the cost to the bank of utilizing or lending the money that the account owner has stored in the bank is reflected in both the simple interest and the compound interest that is accrued on the account. However, when someone borrows money from a bank, the expense of the loan is represented by both the simple interest and the accumulated compound interest.
Distinctions between Simple and Compound Interest
According to their respective meanings, simple interest is determined on the principal loan amount. In contrast, compound interest is computed on both the original amount plus the accrued interest from prior times, hence the phrase “interest on interest” (Sonin & Whitmeyer, 2020). Furthermore, it demonstrates that the simple interest amount is fixed since it is a percentage of the capital. At the same time, the sum of compound interest will change at every accrual period since it is a percent of the borrowing or savings account’s principal plus accumulated interest to date.
Consequently, the principal amount remains constant while using the simple interest technique. However, when using the compound interest approach, the principal amount fluctuates at each accumulation period due to the addition of compound interest to the deposits or loan total (Mansa, 2022). It also means that because the principal amount and interest rate stay identical when a person obtains a loan with simple interest, such persons would not be penalized for overdue interest if they wanted to pay off their debts.
Simple Interest and Compound Interest Ethical Issues
Because double-billing increases investment expenses, ethical questions about the double-billing elements of interest charges are often addressed. The reasonable price valuation of the financing being developed is the precise value the lender obtains and aims to utilize in a loan transaction, according to ethical proponents who establish their case on legal principles. In this situation, payment is exchangeable, and possession is transmitted from the creditor to the borrower. Thus, it looks unethical and unlawful to charge or seek a bigger sum during loan payback than the one that was initially provided (Conflict of Interest, 2022). In comparison, such actions are like those of a shopkeeper who sells salt and then bills the customer for using the product.
Conclusion
The notions of simple interest and compound interest give a mathematical comprehension of the calculations used in the issue of loans and credit facilities. However, their equations and criteria that govern arithmetic operations pose ethical issues about the potential for abuse. In all forms of interest, a smaller or low-value loan might accrue a loan worth that exceeds the principal amount. Furthermore, the accumulated loss that a loan is difficult for others to understand and is expected to incur in the event of an unremarkable withdrawal is an ethical problem. In this instance, the borrower forfeits the advantages of the loan while having paid more than the principal amount. In most cases, they lose the collateral tied to the loan.
References
Conflict of Interest. (2022). Ethics Unwrapped. Web.
Mansa, J. (2022). What Is Simple Interest? The balance. Web.
Sonin, I. M., & Whitmeyer, M. (2020). Some nontrivial properties of a formula for compound interest. Finance Research Letters, 33, 101217. Web.