The two formulas
Simple interest grows in a straight line; compound interest grows exponentially.[1][2]
With simple interest, every year adds the same $600 on $10,000 at 6%. With compound interest, each year's interest is added to the balance, so the next year earns 6% of a larger sum: $600, then $636, then $674.16, and so on.[3]
Side by side: $10,000 at 6%
- Principal
- Simple interest
- Extra from compounding
| Time | Simple interest | Compound interest (yearly) | Difference | Compound ÷ simple |
|---|---|---|---|---|
| 1 year | $600 | $600 | $0 | 1.00× |
| 2 years | $1,200 | $1,236 | $36 | 1.03× |
| 5 years | $3,000 | $3,382 | $382 | 1.13× |
| 10 years | $6,000 | $7,908 | $1,908 | 1.32× |
| 20 years | $12,000 | $22,071 | $10,071 | 1.84× |
| 30 years | $18,000 | $47,435 | $29,435 | 2.64× |
For one year the two are equal, because compounding has not started yet. By 10 years compounding pays 1.32 times as much interest; by 30 years, 2.64 times. Compounding more often than yearly widens the gap a little more.
Which is better, simple or compound interest?
- When you earn interest (savings, CDs, bonds you reinvest), compound interest is better for you.
- When you pay interest, simple interest costs less: interest is never charged on unpaid interest.
Most loans that are paid down in fixed installments charge interest only on the remaining balance each period, so unpaid interest does not compound as long as payments are made on time.
Where each one is used
| Product | Interest method |
|---|---|
| Savings, money market accounts | Compound, usually daily or monthly, quoted as APY |
| Certificates of deposit | Compound, unless interest is paid out |
| CD early-withdrawal penalties | Simple interest for a set number of days or months |
| Treasury bills | Simple discount on a 360-day year |
| Series I savings bonds | Compound, every six months |
| Short-term notes and accrued bond interest | Simple |
Regulation D's minimum penalty for withdrawing a time deposit within six days, for instance, is defined as seven days of simple interest.[5]
Real return and taxes
Both kinds of interest are taxable as ordinary income in the year credited.[4] And neither tells you what the money will buy: with consumer prices up 3.7% over the 12 months to September 2026, an account must pay more than that just to keep its purchasing power.[6]
Try bothThe simple interest calculator solves I = P × r × t for any value; the compound interest calculator adds deposits, any compounding and inflation; the interest calculator compares every method on one sum.
Related calculators
- Simple interest calculatorI = P × r × t, solved for interest, principal, rate or time
- Compound interest calculatorDeposits, any compounding, inflation, goal seek, chart and CSV
- Compound interest formulaA = P(1 + r/n)^nt explained with worked examples
- Interest calculatorInterest earned on a sum, simple or compound, every method side by side
Frequently asked questions
What is the main difference between simple and compound interest?
Simple interest is calculated only on the principal. Compound interest is calculated on the principal plus the interest already added, so it grows faster over time.
Is compound interest better than simple interest?
For savers, yes. For borrowers, simple interest is cheaper.
How much more does compound interest earn?
On $10,000 at 6%, nothing extra in year one, $1,908 more over 10 years and $29,435 more over 30 years (yearly compounding).
Do banks use simple or compound interest?
Savings accounts and CDs compound, and banks must quote the result as an APY. Penalties on CDs are usually figured as simple interest.