CalcPilot guide
Compound vs. Simple Interest: Formulas and Worked Examples
Compare simple and compound interest, understand compounding frequency, and choose the right formula for a loan or savings projection.
Reviewed 2026-06-18 · 6 minute read · CalcPilot Editorial Team
Short answer
Simple interest is calculated only on original principal. Compound interest adds prior interest to the balance, so future interest earns interest too.
Key takeaways
- Simple interest grows linearly.
- Compound interest grows exponentially.
- More frequent compounding increases effective yield.
- Compare rates, fees, term, and cash-flow timing together.
Simple interest
Simple interest equals principal times annual rate times time. A $10,000 balance at 5% for three years earns $1,500, producing an $11,500 final balance.
Because the interest base never changes, each year adds the same dollar amount. Simple interest appears in some short-term loans and educational examples, but real products may use other methods.
Compound interest
Compound interest applies the periodic rate to principal plus accumulated interest. At 5% annual compounding, $10,000 becomes $11,576.25 after three years, higher than the simple-interest result.
The difference grows with rate and time. Compounding is powerful for long-term savings and equally important when debt interest is allowed to accumulate.
Compounding frequency
A nominal annual rate can compound yearly, quarterly, monthly, daily, or continuously. More frequent compounding increases the effective annual yield when the nominal rate stays fixed.
Use the actual product convention and do not compare a nominal annual percentage rate directly with an effective annual yield without converting them to the same basis.
Use the right comparison
For savings, consider contributions, fees, taxes, inflation, and variable returns. For loans, consider payment schedule, amortization, fees, prepayment, and whether interest compounds on unpaid amounts.
A formula is only as accurate as the product terms. Read the agreement and use a cash-flow schedule when payments or rates change over time.
Editorial note: This guide explains general formulas and is not financial, tax, legal, or accounting advice. See our calculation methodology.
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