How different are simple and compound interest over the same term?

Simple interest is calculated only from original principal, while compound interest also earns on prior interest. Their paths start close and diverge as rate, frequency and time increase.

Holding principal, rate and time constant

Simple interest applies the annual rate only to the original principal for each year. Compound interest divides the rate by the chosen frequency and repeatedly applies it to the growing balance.

The primary result is the difference between the two ending values. Both calculations assume a constant rate and no additional contributions, tax or fees.

Locating the interest-on-interest difference

The difference is the interest-on-interest effect. With a short term or low rate it may be small; repeated compounding over many periods makes it more visible.

Linear interest beside exponential growth

Simple = Principal × (1 + Rate ÷ 100 × Years)Compound = Principal × (1 + Rate ÷ 100 ÷ n)^(n × Years)Difference = Compound − Simple

Two interest methods on one balance

The default comparison applies one principal, annual rate and term to both methods. It reports each ending amount and the extra growth created by compounding.

Compounding is worth$16,387.39
With compounding$40,387.39
With simple interest$24,000.00
Compound interest earned$30,387.39

Matching units and compounding frequency

The two results are comparable only when rate and term use the same units. Compounding frequency must also match the formula rather than being assumed.

  • Principal, annual rate and term are identical in both cases.
  • Compound frequency follows the input and displayed equation.
  • Deposits, withdrawals, tax and fees are excluded.

Calculations related to simple vs compound interest

The following tools examine neighbouring parts of the same calculation without changing the inputs or assumptions used above.

Quick answers

Frequently asked questions

Why does compound interest usually exceed simple interest?

Compound interest earns returns on earlier interest, while simple interest continues to use only the original principal.

How does compounding frequency change the result?

The annual rate is divided and applied more often, which changes the effective growth over the term.

Does this include regular deposits?

No. Both sides use only the starting principal, rate and term.

Educational content only. This guide is not financial advice.