Simple and compound interest start from the same idea — a percentage of a balance paid for the use of money — but they grow in completely different ways. Simple interest grows in a straight line. Compound interest grows in a curve that gets steeper over time. Knowing which one applies tells you how fast savings will grow and how quickly debt can build up.
The key difference
- Simple interest is calculated only on the original principal.
- Compound interest is calculated on the principal plus any interest already added.
The formulas
Simple:
A = P × (1 + r × t)
Compound:
A = P × (1 + r/n)n × t
Here r is the annual rate as a decimal, t is years and n is the number of compounding periods per year.
Side-by-side: $10,000 at 6%
| Years | Simple interest balance | Compound (annual) balance | Difference |
|---|---|---|---|
| 1 | $10,600.00 | $10,600.00 | $0.00 |
| 5 | $13,000.00 | $13,382.26 | $382.26 |
| 10 | $16,000.00 | $17,908.48 | $1,908.48 |
| 20 | $22,000.00 | $32,071.35 | $10,071.35 |
| 30 | $28,000.00 | $57,434.91 | $29,434.91 |
For one year with annual compounding the two are identical. After that the gap widens every year — after 30 years compound interest has produced more than two and a half times as much interest.
Comparison at a glance
| Simple interest | Compound interest | |
|---|---|---|
| Calculated on | Original principal | Principal + accumulated interest |
| Growth pattern | Straight line | Accelerating curve |
| Interest each period | Constant | Increases |
| Better for | Borrowers | Savers and investors |
| Common uses | Short loans, car loans, T-bills, late fees | Savings accounts, deposits, investments, credit cards |
Which one applies to me?
Savings accounts and fixed deposits almost always compound — check the APY and compounding frequency. Credit cards compound: unpaid interest joins the balance. Mortgages, car loans and personal loans charge interest on the outstanding balance each month; because your payments cover that interest, it does not compound unless you miss payments. Informal and short-term loans are usually simple interest unless agreed otherwise.
If you are not sure, look for words such as “compounded monthly”, “APY” or “interest capitalised” in the terms — they signal compound interest.
The same rate is not the same deal
A 6% simple-interest product and a 6% compound-interest product are not equivalent. To grow $10,000 into $17,908 in 10 years with simple interest, you would need a rate of about 7.91%. When comparing offers, convert them to the same basis — an effective annual rate is the cleanest comparison. The Interest Rate Calculator does this for you.
Key takeaways
- Simple interest is linear; compound interest accelerates.
- The difference is negligible over a year and huge over decades.
- Savers want compounding; borrowers want simple interest — or, better, to repay quickly.
Compare both for your own numbers with the Simple Interest Calculator and the Compound Interest Calculator.