Boneyard Tools

Simple vs compound interest, with examples

Why flat simple interest grows in a straight line while compound interest curves upward, plus worked numbers and where each one shows up in real life.

Open the Simple Interest Calculator →

The one idea that separates them

Simple interest is always calculated on the original principal and nothing else. Compound interest is calculated on the principal plus every bit of interest that has already been added. That single difference changes the shape of growth. Simple interest adds the same fixed amount each period, producing a straight line, while compound interest adds a slightly larger amount each period, producing a curve that steepens over time.

A side-by-side example

Take 1,000 at 10 percent for three years. With simple interest you earn 100 every year, so after three years the interest is 300 and the balance is 1,300. With annual compounding you earn 100 in year one, 110 in year two on a balance of 1,100, and 121 in year three on 1,210, for 331 total and a balance of 1,331. The 31 difference is small over three years but widens dramatically over decades, which is why long-term savers care so much about compounding.

Where each one appears

Simple interest shows up where interest is settled and paid out rather than left to grow. Common examples include many fixed deposits that pay interest to your account, short-term promissory notes, treasury bills and some auto and personal loans. Compound interest dominates almost everywhere money is left to accumulate, such as savings accounts, mutual funds, retirement portfolios and, unfortunately for borrowers, most credit card balances.

Reading the numbers as a borrower or saver

As a saver, prefer compounding and reinvest interest so it starts earning too. As a borrower, simple interest is usually cheaper than compound interest at the same rate, because your balance is not growing on itself between payments. Always confirm which method a product uses before comparing rates, since a headline rate means very different things under simple versus compound treatment.

Frequently asked questions

Is simple interest ever better for me?

As a borrower, yes. At the same rate and term, a simple-interest loan costs less than a compounding one because interest is only ever charged on the original principal. As a saver, though, compound interest is what you want because your interest starts earning interest of its own.

How do I turn a simple rate into an equivalent compound one?

There is no single fixed conversion, because the gap depends on the term and compounding frequency. The practical approach is to compute the total interest each way over your specific horizon and compare the final amounts directly, which both this tool and the compound interest calculator let you do.