Simple vs. Compound Interest Calculator 2025
Compare simple interest and compound interest side-by-side. Understand why compound interest is the most powerful force in finance.
Simple vs. Compound Interest Calculator 2025
Introduction
Understanding the difference between simple and compound interest is the key to wealth building. Compound interest allows your earnings to earn, creating exponential growth.
Simple Interest
Earned only on the principal (original amount).
Formula: I = P × r × t
- P = Principal
- r = Rate
- t = Time
Example: $10,000 at 5% for 10 years:
- Interest = $10,000 × 0.05 × 10 = $5,000
- Total = $15,000
Compound Interest
Earned on principal + accumulated interest.
Formula: A = P(1 + r)^t
Example: $10,000 at 5% compounded annually for 10 years:
- Total = $10,000 × (1.05)^10 = $16,289
- Interest Earned = $6,289
Difference: Compounding earns an extra $1,289 (25% more!).
Compounding Frequency Matters
| Frequency | Total After 10 Years |
|---|---|
| Annually | $16,289 |
| Quarterly | $16,436 |
| Monthly | $16,470 |
| Daily | $16,487 |
Insight: More frequent compounding = More growth.
FAQ
Q: Do savings accounts use simple or compound interest? A: Compound. Most compound daily or monthly.
Q: Why do loans use compound interest? A: To maximize lender profit. Unpaid interest gets added to principal, accelerating growth.
Related Tools
- Compound Interest Calculator: /calculator/07-compound-interest-calculator
Conclusion
Compound interest is the reason billionaires get richer and why starting early matters. Use this calculator to visualize the difference.