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Compound Interest vs Simple Interest

Compound Interest vs Simple Interest

Section titled “Compound Interest vs Simple Interest”

Simple interest is calculated only on the original principal.

Compound interest is calculated on the principal and previously earned interest (“interest on interest”).

Use the tool: Compound Interest Calculator

Simple interest formula

Section titled “Simple interest formula”
A=P(1+rt)A = P(1 + rt)

Where:

  • PP = principal
  • rr = annual interest rate (decimal)
  • tt = time in years

Compound interest formula (principal only)

Section titled “Compound interest formula (principal only)”
A=P(1+rn)ntA = P\left(1 + \frac{r}{n}\right)^{nt}

Where:

  • nn = number of compounding periods per year

Quick comparison example

Section titled “Quick comparison example”

Example: P=\10,000,, r=5%,, t=10$ years.

TypeResult (approx.)Why it differs
Simple interest15,00015,000Linear growth
Compound interest (annual)16,28916,289Interest earns interest

When each is used

Section titled “When each is used”
  • Simple interest: some short-term loans, basic classroom examples, some bonds.
  • Compound interest: savings accounts, investing, many real-world growth scenarios.
Section titled “Related tools”