Compound vs Simple Interest
How compound and simple interest differ, a side‑by‑side growth table, and where each one is actually used.
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Frequently asked questions
What is the difference between simple and compound interest?
Simple interest is earned only on the principal; compound interest is earned on the principal plus previously accumulated interest.
What are the formulas?
Simple interest is I = P × r × t. Compound amount is A = P(1 + r/n)^(nt).
Which earns more?
Compound interest, because it earns interest on interest. The advantage grows with time and a higher rate.
When is simple interest used?
Often for short-term lending and some bonds, where interest does not compound on itself.
Why does the gap widen over time?
Because compound interest keeps adding to a growing balance, the curve accelerates while simple interest stays linear.
Is compounding good or bad?
Good when saving or investing, but costly on debt like credit cards, where it works against you.
Simple vs compound interest
The difference is what the interest is charged on. Simple interest is calculated only on the original principal, while compound interest is calculated on the principal plus the interest already added — earning "interest on interest".
The two formulas
Simple interest: I = P × r × t. Compound amount: A = P(1 + r/n)^(nt). Simple interest grows in a straight line; compound interest grows along an accelerating curve.
Worked comparison
£1,000 at 6% for 10 years: simple interest gives £1,000 × 0.06 × 10 = £600 (£1,600 total). Compounded annually it gives about £1,791 total — nearly £200 more — and the gap widens the longer the money is invested.
Compounding works in your favour when saving or investing and against you on debt such as credit cards. The longer the time and the higher the rate, the bigger the advantage over simple interest.
Results are estimates for general guidance in United Kingdom and may not reflect the latest local rates, fees or rules. Check official sources before making decisions.