Understanding Interest: Simple vs. Compound

Interest is the cost of borrowing money or the return on an investment. It is a fundamental concept in finance, and understanding the difference between simple and compound interest is crucial for making informed financial decisions. Our calculator helps you visualize this difference.

Simple Interest

Simple interest is calculated only on the original principal amount of a loan or investment. It does not take into account any interest that has been accumulated in previous periods. The formula is straightforward: Interest = Principal × Rate × Time. It's a linear calculation, meaning the amount of interest earned is the same for each period.

Compound Interest

Compound interest is "interest on interest." It is calculated on the initial principal and also on the accumulated interest from previous periods. This can have a powerful effect over time, leading to exponential growth. The formula is Total Amount = Principal * (1 + Rate/Frequency)^(Frequency*Time). The more frequently interest is compounded (e.g., monthly vs. annually), the greater the total amount will be over time.

Key Differences

The main takeaway is that compound interest grows much faster than simple interest. For savers and investors, this is a powerful tool for wealth creation. For borrowers, it means that the cost of a loan can grow significantly if not paid down quickly. Use our calculators to see the difference for yourself!