Simple interest
Simple interest is calculated only on the original amount (the principal). The formula is I = P × r × t. $10,000 at 5% for 10 years earns $10,000 × 0.05 × 10 = $5,000, so you end with $15,000. Our simple interest calculator works it out instantly.
Compound interest
Compound interest is calculated on the principal plus interest already earned. The formula is A = P × (1 + r/n)^(n×t), where n is the number of compounding periods per year. The same $10,000 at 5% compounded annually for 10 years grows to about $16,289, earning $6,289, or $1,289 more than simple interest. See it year by year in our compound interest calculator.
The gap grows over time
Over 30 years, simple interest at 5% turns $10,000 into $25,000, while annual compounding produces about $43,219. The longer the period, the larger the advantage of compounding, which is why starting to save early is so powerful.
Compounding frequency
Interest can compound yearly, monthly or daily. More frequent compounding gives slightly more: $10,000 at 5% for 10 years compounded monthly becomes about $16,470. When comparing savings accounts, look at the APY (annual percentage yield), which includes compounding, rather than the nominal rate.
Where you see each type
Simple interest is common in some car loans, short-term personal loans and certain bonds. Compound interest applies to savings accounts, most investments and, importantly, credit card debt, where interest compounds daily on unpaid balances.
Compounding against you
On debt, compounding works in the lender's favor. A $3,000 credit card balance at 24% APR that's never paid down roughly doubles in about three years. Paying more than the minimum stops this growth. Our loan calculator shows the cost of different payment plans.
The rule of 72
For a quick estimate of compound growth, divide 72 by the interest rate to find how many years it takes to double. Read our Rule of 72 guide for examples.
Bottom line
For saving, look for compound interest and high APY. For borrowing, look for low rates and pay balances off quickly.
Frequently asked questions
What is the difference between simple and compound interest?
Simple interest is earned only on the principal; compound interest is also earned on previous interest.
Which earns more, simple or compound interest?
Compound interest, and the difference grows over time.
What is APY?
Annual percentage yield, the effective annual rate including compounding.
Do credit cards use compound interest?
Yes, typically compounded daily on unpaid balances.