Simple Interest vs Compound Interest

Same starting amount, same rate, same deposits — two different rules for interest. Simple interest is always calculated on the original principal; compound interest is calculated on everything accumulated so far. The gap between them is the entire effect of compounding.

Final balance — compound interest$144,572.72
Final balance — simple interest$105,460.00
Extra from compounding$39,112.72
Interest — compound$86,572.72
Interest — simple$47,460.00

Compounding is assumed monthly, contributions land at the end of each month in both methods. Under simple interest, each deposit earns interest only for the time it is held, at the flat rate, with no interest-on-interest.

The gap widens with time

With the default inputs — $10,000.00 to start, $200.00 a month, a hypothetical 7% — here is how the two methods compare as the years pass. Early on they are nearly identical; the difference is small because there is little accumulated interest to compound. Later, compound growth bends upward while simple interest keeps its straight line.

Years	Simple interest	Compound interest	Compounding advantage
5	$27,565.00	$28,494.83	$929.83
10	$49,330.00	$54,713.58	$5,383.58
15	$75,295.00	$91,881.93	$16,586.93
20	$105,460.00	$144,572.72	$39,112.72
25	$139,825.00	$219,268.52	$79,443.52
30	$178,390.00	$325,159.17	$146,769.17

The two formulas

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

In the simple formula, interest is a fixed slice of the original principal P each year — the balance grows in a straight line. In the compound formula, the exponent t is what changes everything: the balance is multiplied by a growth factor every period, so the line curves. Neither formula describes a real account exactly — they are models, and this page exists to make the difference between the two models concrete.

For the full calculator with compounding-frequency options and a year-by-year schedule, go back to the compound interest calculator. For the savings-goal version of the same question, see the savings goal calculator.

Estimates only: all figures use a fixed hypothetical rate for illustration. They are not the terms of any loan or account, and this page is not financial advice.

Frequently asked questions

Where is simple interest actually used?

Some short-term loans, certain bonds and many textbook problems use it, and it is the basis of some car-loan and consumer-credit calculations. Most savings and investment growth is described with compound interest instead.

Why do deposits earn less under simple interest here?

Because each deposit only earns the flat rate for the months it is held, and never earns interest on interest earned earlier. The first deposit gets nearly the full period of interest; the last one gets almost none.

Is compound interest always better for the saver?

For money you hold, yes — compounding works in your favour. For money you owe, it works against you the same way. The maths is symmetric; the sign depends on which side of it you stand.

Does the comparison change with a different compounding frequency?

Slightly. More frequent compounding raises the compound column a little. The comparison tool above fixes frequency at monthly to keep the two methods comparable.