Compound Interest vs Simple Interest: What's the Difference?

For an unchanged principal with no payments, simple interest gives A = P(1 + rt). Compound interest gives A = P(1 + r/n)^(nt). These examples compare the same starting principal and nominal rate; fees, taxes and inflation are excluded.

At $5,000 and 6% nominal annual interest for 10 years, simple interest gives $8,000.00. Monthly compounding gives $9,096.98. The difference is $1,096.98. This comparison changes if the rate, compounding frequency or cash flows change.

For the monthly-compounding example, the end-of-year balances for years 1 through 5 are $5,308.39, $5,635.80, $5,983.40, $6,352.45, $6,744.25. Each year’s interest is that year’s balance minus the prior year’s balance; it is not the whole balance.

In a separate 30-year example with $10,000 and 7% compounded annually, the total is $76,122.55; simple interest gives $31,000.00. The chart explicitly uses annual compounding. A monthly-compounding example would have a different total.

A real amortizing loan usually reduces principal as payments arrive. A simple-interest loan does not charge the same dollar amount forever if principal is being repaid. A mortgage is not adequately described just by calling it a compound-interest product; the contract, amortization schedule, rate changes and payment timing matter.

Credit cards can calculate interest from daily balances. Daily interest accrual does not by itself establish that every issuer posts interest to the balance each day. Use the agreement and statement to identify rate categories, grace periods and payment allocation. This article supplies no universal minimum-payment payoff estimate.

For savings accounts, compare the effective annual yield and fees, rather than assuming a more frequent schedule always makes one account better. For market investments, a constant return is a scenario, not a promised interest-crediting rule.

To reproduce the 10-year example, use principal 5000, monthly contribution 0, annual rate 6, monthly compounding and 10 years. The calculator is a growth model; it does not reproduce a card statement or loan repayment schedule.

Correction, October 29, 2026: examples, assumptions, FAQs and visuals were reviewed together. Unsupported current statistics and promises were removed. The stated calculations use independent high-precision references.