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 calculated only on the original principal. Compound interest is calculated on the principal plus interest already earned, so it grows faster over time.
What is the simple interest formula?
Interest = principal × rate × time, with the rate as a decimal. The final amount is principal plus that interest.
Which is better for savings?
Compound interest grows savings faster because you earn interest on your interest. For borrowing, simple interest costs less than compound interest over time.
When is simple interest used?
It is used in some short‑term personal loans and in bond coupon payments, while most everyday savings and debts use compound interest.
Compound vs Simple Interest
Both add interest to money, but they differ in what the interest is calculated on.
The two formulas
Simple interest: interest is only ever calculated on the original principal — Interest = P × r × t. Compound interest: interest is calculated on the principal plus interest already added.
Side by side
1,000 at 5% a year:
| Years | Simple | Compound (yearly) |
|---|---|---|
| 1 | 1,050.00 | 1,050.00 |
| 5 | 1,250.00 | 1,276.28 |
| 10 | 1,500.00 | 1,628.89 |
| 20 | 2,000.00 | 2,653.30 |
The gap widens every year, because compound interest keeps building on a growing balance while simple interest adds the same amount each year.
Where each is used
Simple interest appears in some short‑term loans and bond coupon payments. Compound interest is the norm for savings accounts, investments, mortgages and credit cards.
Examples are illustrative and for general education, not financial advice.
Results are estimates for general guidance in Ireland and may not reflect the latest local rates, fees or rules. Check official sources before making decisions.