Finance · 5 min read
Simple Interest vs Compound Interest: What's the Difference?
Understanding the difference between simple and compound interest is fundamental to making smart financial decisions — whether you're saving, investing, or borrowing money.
Simple Interest
Simple interest is calculated only on the original principal amount. The formula is:
SI = P × R × T / 100
Example: $10,000 at 8% for 5 years = $10,000 × 8 × 5 / 100 = $4,000 interest. Total: $14,000.
Compound Interest
Compound interest is calculated on the principal plus accumulated interest. The formula is:
A = P(1 + r/n)^(nt)
Same example with annual compounding: $10,000 at 8% for 5 years = $10,000 × (1.08)^5 = $14,693. Interest earned: $4,693 — that's $693 more than simple interest.
Side-by-Side Comparison
| Feature | Simple Interest | Compound Interest |
|---|---|---|
| Calculated on | Principal only | Principal + accumulated interest |
| Growth pattern | Linear | Exponential |
| Better for | Borrowers (lower cost) | Savers (higher returns) |
| Common uses | Car loans, personal loans | Savings, investments, mortgages |
The Power of Compounding Over Time
The real magic of compound interest shows up over long periods. $10,000 invested at 8% compound interest grows to $21,589 in 10 years, $46,610 in 20 years, and $100,627 in 30 years. With simple interest, that same investment only reaches $34,000 in 30 years — less than a third of the compound amount.
Try Our Calculators
Calculate both types with our free tools:
- Simple Interest Calculator — SI = P × R × T / 100 with quick reference table
- Compound Interest Calculator — Interactive chart with CI vs SI comparison