Simple vs compound interest: what’s the difference?
They sound similar but diverge dramatically over time. The difference is whether earned interest gets added back to the balance to earn more.
| Compound | Simple | |
|---|---|---|
| Earns interest on | Principal + past interest | Principal only |
| Growth shape | Accelerating (curve) | Constant (straight line) |
| Common in | Savings, investing, most loans | Some bonds, short-term loans |
| Over long periods | Far more | Far less |
The same rate, very different outcomes
At the same rate, the two are identical for the first period — then compound interest pulls ahead and never looks back, because each period it earns on a larger balance. Over decades the gap becomes enormous. Compare the curves with the Compound Interest and Simple Interest calculators.
Where you’ll meet each
Savings accounts, investments, and most mortgages compound. A few products — certain bonds and short-term personal loans — use simple interest. When you’re the one earning, you want compounding; when you’re the one paying, simple interest (or paying off compounding debt fast) is in your favor.
The verdict
For growing money, compound interest wins decisively over time — start early and let it run. For debt, the same force works against you, so kill compounding balances fast. See both in the Compound Interest Calculator.
Frequently asked questions
- Which is better, simple or compound interest?
- For money you’re growing (savings, investments), compound is far better. For money you owe, simple interest is cheaper — which is why paying down compounding debt quickly matters.
- Do mortgages use simple or compound interest?
- Most mortgages are amortizing loans where interest is charged on the remaining balance each period — effectively compounding, though the fixed payment keeps it from ballooning.
- How fast does compound interest beat simple?
- They match for one period, then compound pulls ahead immediately and the gap widens every period. Over 20–30 years at typical rates, compound can be multiples of simple.
Settle it with your numbers
Free, in-browser calculators for everything above.