Simple vs Compound Interest: What's the Difference?
Last updated 2026-09-11
Simple and compound interest sound similar but produce very different results over time — the difference is whether interest earns interest of its own.
Simple interest formula
Interest = Principal × Rate × Time ÷ 100. It's calculated only on the original amount, every period.
Compound interest formula
A = P(1 + r/n)^(nt), where n is how many times per year interest compounds. Each period's interest is added to the principal before the next period's interest is calculated.
Compare the outcomes
The gap between the two grows larger the longer the money sits and the more frequently interest compounds.
Example
$1,000 at 5% annual interest over 10 years: simple interest gives $500 total interest ($1,500 final). Compound interest (compounded annually) gives about $628.89 in interest ($1,628.89 final) — over 25% more.
Important Considerations
- Savings accounts and investments typically use compound interest; some simple loans use simple interest.
- Compounding frequency matters — monthly compounding earns more than annual compounding at the same nominal rate.
- Credit card debt almost always compounds, which is why balances can grow quickly if not paid off.
Frequently Asked Questions
- Which is better for savers, simple or compound?
- Compound interest, since it lets your earned interest also earn interest — the effect grows with time and compounding frequency.
- Which is worse for borrowers?
- Compound interest, for the same reason — unpaid interest gets added to the principal, so the amount owed can grow faster than with simple interest.
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