Simple vs Compound Interest: What's the Difference?
Published 10/1/2025 · 2 min read · Finance calculators
Simple interest is paid only on the original amount, so it grows in a straight line. Compound interest is paid on the principal plus the interest already earned, so it snowballs. $1,000 at 5% for 10 years earns $500 with simple interest (final $1,500), but $629 with yearly compounding (final $1,629). The longer the term, the bigger the gap.
Simple interest grows in a straight line; compound interest snowballs. Here's how each works, a worked example, and which one you meet in real life.
Simple interest
Simple interest is calculated only on the original sum, the principal, using I = P × r × t. Lend or borrow $1,000 at 5% for 10 years and you get $1,000 × 0.05 × 10 = $500 of interest, the same $50 every year. Because the base never changes, the total climbs in a straight, predictable line.
Compound interest
Compound interest is calculated on the principal plus the interest already added, using A = P(1 + r)^t for yearly compounding. The same $1,000 at 5% over 10 years grows to $1,000 × 1.05^10 = $1,629 — $129 more than simple interest, because each year's interest starts earning interest of its own. The base keeps growing, so the growth accelerates.
Why the gap grows
Over ten years the difference is a modest $129, but it widens fast with time. At 30 years, that same $1,000 at 5% reaches $2,500 with simple interest but about $4,322 with compounding — nearly double. This is why time is the investor's friend: the earlier money starts compounding, the larger the share of the final total that is pure interest.
Which is which in real life
Most of the interest you meet compounds. Savings accounts, investments and credit-card debt all compound — which helps you as a saver and hurts you as a borrower. Some products, such as certain personal or car loans, charge simple interest, which works in your favour when borrowing. Always check which one applies before you sign.
| Aspect | Simple | Compound |
|---|---|---|
| Interest paid on | Principal only | Principal + earned interest |
| Growth | Linear | Exponential (snowball) |
| $1,000 at 5%, 10y | $1,500 | $1,629 |
| Better when you're | Borrowing | Investing |
Worked with our own calculator
Simple interest calculator
Given
- Principal
- $500.00
- Annual rate (%)
- 4.5
- Time (years)
- 2
Result
- Interest earned
- $45.00
- Final amount
- $545.00
These figures are produced by the calculator below, not typed in by hand — they are recomputed whenever the tool changes.
Run it on your own figures →Frequently asked questions
- Which is better, simple or compound?
- For savings and investments, compound is better because you earn more. For borrowing, simple interest is cheaper.
- Is a mortgage simple or compound?
- Most consumer loans, including mortgages, use compound interest. Always check the terms of your specific loan.
- How fast does compound interest double money?
- Use the rule of 72: divide 72 by the yearly rate. At 6%, money roughly doubles in 72 ÷ 6 = 12 years.
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