Simple vs Compound Interest Comparison
Compare simple and compound interest side by side. Enter principal, rate and years to see both final balances and a chart showing how compounding pulls ahead over time.
How to use this tool
- Enter principal, annual interest rate and years in the fields above.
- Results update instantly as you type — or click Calculate.
- Read your compound balance and the full breakdown beneath it.
Simple interest: A = P(1 + rt). Interest is always calculated on the original principal.
Compound interest: A = P(1 + r)^t. Interest is added to the principal each year and itself earns interest — this is the compounding advantage.
⚠ This tool provides general estimates for education only and is not financial, tax or legal advice. Figures may not reflect your situation — verify with a qualified professional.
Formula
Simple interest balance: BS = P × (1 + r × t)
Compound interest balance: BC = P × (1 + r)t
Compounding advantage = BC − BS
Where P = principal, r = annual rate (decimal), t = years.
How it works
This calculator computes both a simple interest balance (interest earned only on the original principal) and an annually compounded balance (interest earned on the growing total) for the same principal, rate, and term. The compounding advantage shows how much extra the compound approach earns. It assumes annual compounding; more frequent compounding (monthly, daily) would produce a higher compound balance than shown.
Worked example
- Principal P = $1000, annual rate r = 5% = 0.05, term t = 10 years.
- Simple balance = 1000 × (1 + 0.05 × 10) = 1000 × 1.50 = $1500.00.
- Compound balance = 1000 × (1.05)^10 = 1000 × 1.62889 = $1628.89.
- Simple interest earned = $1500.00 − $1000 = $500.00.
- Compound interest earned = $1628.89 − $1000 = $628.89; Compounding advantage = $628.89 − $500.00 = $128.89.
Simple balance: $1500.00; Compound balance: $1628.89; Compounding advantage: $128.89.
Common mistakes to avoid
- Entering the interest rate as a decimal (0.05 for 5%) when the calculator expects a percentage (5), or vice versa, shifting computed balances by 100x.
- Assuming the chart reflects monthly or daily compounding when the formula uses annual compounding — more frequent compounding would widen the gap further than shown.
- Interpreting the year-1 compounding advantage as meaningful — simple and compound interest produce the same result in year 1; the divergence only becomes significant over many years.
Key terms
- Simple interest
- Interest calculated only on the original principal each period. Total interest = P × r × t, regardless of accumulated interest.
- Compound interest
- Interest calculated on both the principal and previously accumulated interest, causing growth to accelerate over time.
- Principal (P)
- The original sum of money deposited or lent before any interest is added.
- Annual rate (r)
- The yearly percentage interest rate, converted to a decimal for the formula.
- Compounding advantage
- The extra balance earned by compound interest compared with simple interest over the same term — widens significantly as time or rate increases.
Frequently asked questions
- When do simple and compound give the same result?
- At t = 1 year (with annual compounding) they are identical. Beyond year 1 compound interest always exceeds simple interest for positive rates.
- Which does a bank savings account use?
- Most savings accounts and mortgages use compound interest. Some short-term loans and bonds use simple interest.