Simple & Compound Interest Calculator

Compare simple and compound interest side by side. See how compounding frequency affects your returns and understand the difference between the two methods.

Interest Details

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yrs

Enter your details and click "Calculate" to compare simple and compound interest.

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Pro Tip

When comparing financial products, always check whether interest is simple or compound. A 5% compound rate earns more than a 5% simple rate over time.

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Simple vs Compound Interest

Simple interest is calculated only on the original principal amount. The formula is straightforward: multiply the principal by the rate and the time. This type of interest is commonly used for short-term loans and some bonds.

Compound interest is calculated on the principal plus previously earned interest. This creates a snowball effect where your money accelerates its growth over time. Savings accounts, CDs, and most investment returns use compound interest.

The difference between simple and compound interest becomes dramatic over long periods. For example, $10,000 at 6% for 30 years earns $18,000 in simple interest but over $47,000 in compound interest with monthly compounding.

Understanding this distinction is crucial for both borrowers and investors. As a borrower, compound interest means your debt grows faster. As an investor, it means your wealth compounds more quickly.

Interest Formulas

Simple: I = P × r × t   |   Compound: A = P(1 + r/n)nt

Where:

I = Interest earned (simple)

A = Final amount (compound)

P = Principal amount

r = Annual interest rate (decimal)

n = Compounding periods per year

t = Time in years

Example

$10,000 at 6% for 10 years:

  • • Simple interest: $10,000 x 0.06 x 10 = $6,000 (total: $16,000)
  • • Compound (monthly): $10,000 x (1.005)^120 = $18,194
  • • Compound interest earned: $8,194
  • • Compounding advantage: $2,194 more than simple interest

Frequently Asked Questions

When is simple interest used?
Simple interest is typically used for short-term loans, auto loans, some personal loans, and Treasury bills. It is simpler to calculate and results in less total interest paid compared to compound interest.
How does compounding frequency affect returns?
More frequent compounding produces higher returns. Daily compounding yields slightly more than monthly, which yields more than quarterly or annual. The marginal benefit decreases as frequency increases.
Can compound interest work against me?
Yes. When you are the borrower, compound interest means you pay interest on accumulated interest. Credit card debt is a common example where compound interest works against consumers.
What is continuous compounding?
Continuous compounding is the mathematical limit of compounding frequency approaching infinity. The formula uses Euler's number: A = Pe^(rt). Daily compounding produces nearly identical results.