Compound Interest vs Simple Interest
Simple interest and compound interest are two different answers to the same question: what does the balance earn next period? Under simple interest, interest is calculated only on the original principal, so the interest grows linearly over time. Under compound interest, each period’s interest is added to the balance, and later interest is calculated on both the original principal and all prior interest — the balance grows exponentially. Over short horizons the difference can be small; over long horizons it can be dramatic, because compounding makes time itself part of the return.
This page compares the two calculators. It is informational, not investment or lending advice.
What each calculator does
The simple interest calculator keeps the principal fixed. Enter a principal, an annual rate, and time in years, and it reports the simple interest, the final amount, and the average interest per month over the horizon. It matches agreements and notes where interest never earns more interest.
The compound interest calculator models reinvestment. It grows a starting amount at an annual rate over a chosen number of years, with optional monthly contributions converted to the compounding frequency you select — annually, quarterly, monthly, or daily. It separates the future value into what you deposited and what the balance earned, so you can see how much of the ending number came from interest on interest.
Side-by-side comparison
| Feature | Simple interest calculator | Compound interest calculator |
|---|---|---|
| Interest base | Original principal only | Principal plus previously earned interest |
| Growth shape | Linear | Exponential |
| Formula | Interest = principal × rate × time | FV = PV × (1 + r/m)^(m × t) |
| Contributions | Not modeled | Monthly contributions converted to the compounding period |
| Compounding frequency | Not applicable | Annual, quarterly, monthly, or daily |
| Key output | Interest, final amount, average monthly interest | Future value split into deposits and interest earned |
When to use which
Consider a $10,000 balance at a 5 percent annual rate for 10 years. Under simple interest, each year earns $500 on the original principal, for $5,000 of total interest and a final amount of $15,000. Compounded annually, the same balance grows to about $16,288.95 — the extra roughly $1,288.95 is interest earned on interest. The gap widens with the rate, the number of years, and the compounding frequency.
Use the compound interest calculator when savings, certificates of deposit, or investment illustrations reinvest earnings and you want to model growth, contributions, or different compounding frequencies. Use the simple interest calculator when the agreement applies interest only to the original principal — common for some short-term notes and certain loan structures — or when you want the linear interest amount separated from the final balance. Before relying on either, check the actual contract or account disclosure for the method that applies; the difference between the two models is a real-money difference when the horizon is long.
Where to start
- Compound interest calculator — future value with contributions and compounding frequency.
- Simple interest calculator — linear interest on principal, with final amount and monthly average.
Informational note: This page is an educational comparison, not investment, lending, or tax advice. The compound result is a mechanical time-value estimate that excludes taxes, fees, inflation, and market volatility, and real accounts may compound differently than modeled — verify the method in the actual agreement or disclosure.