Guide
Simple Interest vs Compound Interest
Simple interest pays only on the starting amount. Compound interest pays on the starting amount plus any interest already earned. Over time, the compound path can pull ahead—especially with higher rates and more frequent compounding.
Published: March 11, 2025 · Updated: December 21, 2025 · By FinToolSuite Editorial
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Use the calculator to see simple-like vs compound scenarios side by side.
Open the calculatorQuick answer
Simple interest: interest only on the original principal. Compound interest: interest on principal plus prior interest. See the formula here: compound interest formula.
Disclaimer
Educational purposes only; not financial advice. Results are illustrative; real returns vary and balances can go down as well as up. Fees, taxes, inflation, and account rules vary by provider and country.
Definitions
Simple interest adds interest only on the starting amount each period. It’s common in short-term or fixed-rate products where the interest does not “build on itself.”
Compound interest adds earned interest back to the balance, so future interest is calculated on a larger base. You’ll see it in savings accounts, many investments, and longer-term projections.
Side-by-side example #1
Principal £1,000, rate 5% per year, time 10 years.
| Scenario | Ending balance |
|---|---|
| Simple interest (5% × 10 years) | £1,500 |
| Compound interest (annual compounding) | ~£1,629 |
Difference: ~£129 after 10 years. Try these inputs in the calculator.
Side-by-side example #2 (longer horizon)
Same inputs, but 25 years instead of 10.
| Scenario | Ending balance |
|---|---|
| Simple interest (5% × 25 years) | £2,250 |
| Compound interest (annual compounding) | ~£3,386 |
Difference grows with time: ~£1,136 here. Try it in the calculator.
When the gap widens
- Longer time horizons
- Higher rates
- More frequent compounding
- Adding contributions (compound scenarios stack new deposits plus interest)
See more on compounding frequency: daily vs monthly vs yearly compounding.
Compounding frequency note
Simple interest does not compound. Compound interest can compound yearly, monthly, or daily. Frequency usually matters less than time and rate, but it still nudges results.
Common misconceptions
- “Simple interest is always worse.” Some products use simple interest by design; the context matters.
- Confusing APR/APY: APY reflects compounding; APR is a nominal rate. See the formula for how rate and frequency interact.
FAQs
What is the difference between simple and compound interest?
Simple interest pays only on the principal; compound interest pays on principal plus prior interest.
Which grows faster over time?
Compound interest generally grows faster, especially with longer timelines and higher rates.
Is compound interest always better?
Not always. It depends on the product and terms, but for growth scenarios, compounding often leads to a higher end balance.
Does compounding frequency matter?
Yes, but less than time and rate. More frequent compounding nudges the balance upward.
Can a loan have compound interest?
Some loans use compounding. Check the terms to see how interest is calculated.
Where can I calculate compound interest?
Use the compound interest calculator to test your numbers.
What’s the compound interest formula?
A = P(1 + r/n)n·t. See the formula breakdown.
How big is the difference over 5 vs 20 years?
The gap usually widens with time. Short horizons show smaller differences; longer horizons increase the compound advantage.
Run your comparisons
Compare a “simple-like” annual scenario to a compound scenario with monthly frequency in the calculator.
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