Simple interest and compound interest both calculate growth over time, but they work differently. The main difference is whether interest is added back into the balance.
Use the calculator first, then read the guide below to understand the formula and examples.
Direct answer
Simple interest is calculated only on the original principal. Compound interest is calculated on the principal plus accumulated interest.
Simple interest formula
Simple interest = principal × rate × time ÷ 100.
Compound interest idea
Compound interest grows because each compounding period adds interest to the balance, and the next period can earn interest on that larger balance.
Example
If you invest 1,000 at 10% for 2 years, simple interest gives 200 interest. With annual compounding, the final amount becomes 1,210, so the interest is 210.
Which one grows faster?
Compound interest usually grows faster over longer periods, especially when the rate is higher or the compounding frequency is more frequent.
FAQs
Which is better for savings?
Compound interest is usually better for savings because it can grow faster over time.
Which is easier to calculate?
Simple interest is easier to calculate manually.
Does compounding frequency matter?
Yes. Monthly compounding usually grows more than yearly compounding at the same annual rate.