Financial education
Simple Interest vs Compound Interest
Simple interest and compound interest use different methods for calculating growth over time.
How the math works
Simple interest is calculated only on the original principal for every period. Compound interest is calculated on the principal plus any interest already added, so the base it's calculated from grows every period.
Worked example
$10,000 at 5% for 10 years earns $5,000 in simple interest (a flat $500/year). At 5% compounded annually, the same $10,000 grows to about $16,289 — $6,289 in interest, $1,289 more than simple interest, purely from compounding.
What to watch for
- The gap between simple and compound interest widens the longer the time period runs
- Some loan products (especially short-term or add-on loans) use simple interest, which can work in the borrower's favor
- Compounding frequency (annual, monthly, daily) changes the result even at the same stated rate
Practical takeaway
For debts, simple interest is generally better for the borrower; for savings and investments, compound interest is what you want working in your favor.