Compound vs Simple Interest
How compound and simple interest differ, a side‑by‑side growth table, and where each one is actually used.
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Frequently asked questions
What is the difference between simple and compound interest?
Simple interest is earned only on the principal; compound interest is earned on the principal plus previously accumulated interest.
What are the formulas?
Simple interest is I = P × r × t. Compound amount is A = P(1 + r⁄n)^(nt).
Which earns more?
Compound interest, because it earns interest on interest. The advantage grows with time and a higher rate.
When is simple interest used?
Often for short-term loans, some car loans and certain bonds, where interest does not compound.
Why does the gap widen over time?
Because compound interest keeps adding interest to a growing balance, the curve accelerates while simple interest stays linear.
Is compounding good or bad?
Good when you are saving or investing, but costly when you owe money, as on credit-card debt where it works against you.
Simple vs compound interest
The difference comes down to what the interest is charged on. Simple interest is calculated only on the original principal, while compound interest is calculated on the principal plus all the interest already added — so it earns "interest on interest".
The two formulas
Simple interest: I = P × r × t. Compound amount: A = P(1 + r⁄n)^(nt). With simple interest the amount grows in a straight line; with compound interest it grows along an accelerating curve.
Worked comparison
$1,000 at 6% for 10 years: simple interest gives 1000 × 0.06 × 10 = $600 of interest ($1,600 total). Compounded annually it gives about $1,790 total — nearly $190 more — and the gap widens the longer the money is invested.
Compounding works powerfully in your favour when saving or investing, and against you on debt like credit cards. The longer the time horizon and the higher the rate, the larger the advantage compounding has over simple interest.
Results are estimates for general guidance in United States and may not reflect the latest local rates, fees or rules. Check official sources before making decisions.