Simple vs Compound Interest
Simple and compound interest both add a percentage to a starting amount, but they treat the interest you have already earned very differently. That one difference is what separates slow, steady growth from the snowball effect that builds real wealth.
Simple interest
Simple interest is charged only on the original amount, called the principal. It never earns interest on interest, so it grows in a straight line. The formula is principal x rate x time. It is common on short-term loans and some bonds.
Compound interest
Compound interest is charged on the principal plus the interest already added. Each period builds on the last, so the balance curves upward and gets steeper over time. This is how savings, investments and most long-term debt behave.
Side-by-side example
Put 1,000 away at 5% for 10 years. With simple interest you earn 50 a year, so 500 in total, ending at 1,500. With compound interest (compounded monthly) you end at about 1,647. Over 30 years the gap explodes: simple gives 2,500, while compound gives about 4,468.
Why the gap grows
Early on the two look almost identical. The difference only becomes dramatic over long periods, because compounding works on an ever-larger balance. This is exactly why starting to save early matters so much, and why high-interest debt left unpaid gets out of hand.
Work it out
Compare them yourself with the Simple Interest Calculator and the Compound Interest Calculator. To add regular deposits, use the Investment Calculator.
Frequently asked questions
Which grows faster, simple or compound interest?
Compound, over any period longer than one payment cycle, because it earns interest on interest. The gap widens dramatically over years.
When is simple interest used?
Often on short-term loans and some bonds, where interest is not reinvested. Long-term savings and most debt compound instead.
Can compound interest work against me?
Yes. On unpaid debt like credit cards, compounding makes the balance grow, which is why high-rate debt gets out of hand.