Comparison guide
Simple Interest vs Compound Interest
Understand the difference between simple and compound interest with formulas, examples and a calculator link.
Simple interest vs compound interest
Simple interest is calculated only on the original amount. Compound interest is calculated on the original amount and on interest that has already been added.
The difference can be small in the early years, but it can become much larger over long periods.
Example: £10,000 at 5%
| Years | Simple interest balance | Compound interest balance | Extra from compounding |
|---|---|---|---|
| 1 | £10,500.00 | £10,511.62 | £11.62 |
| 5 | £12,500.00 | £12,833.59 | £333.59 |
| 10 | £15,000.00 | £16,470.09 | £1,470.09 |
| 20 | £20,000.00 | £27,126.40 | £7,126.40 |
Open this simple vs compound example.
Simple interest formula
A = P(1 + r × t)Here, P is the principal, r is the annual rate as a decimal, and t is the time in years.
Compound interest formula
A = P(1 + r/n)^(n × t)The compound formula adds n, the number of times interest is compounded per year.
Why it matters
Simple interest is useful for straightforward estimates, but compound interest is usually closer to how savings growth, reinvested returns and some debts build over time.
Calculate it yourself
Use the free compound interest calculator to adjust the amount, rate, term, compounding frequency and regular deposits.
FAQ