Two ways interest is calculated
When you save or borrow money, interest can be worked out in one of two ways: simple or compound. The gap between them looks small at first but becomes dramatic over time — and understanding it is one of the highest-value bits of everyday math.
Simple interest
Simple interest is charged only on the original principal. It never earns interest on interest.
Interest = P × r × t
Total = P + Interest
Example: $10,000 at 8% per year for 3 years.
- Interest = 10,000 × 0.08 × 3 = $2,400
- Total = $12,400
Every year adds the same flat $800.
Compound interest
Compound interest adds each period's interest back to the balance, so the next period earns interest on a bigger number. This "interest on interest" is what makes money grow.
Total = P × (1 + r/n)^(n×t)
Here n is how many times per year interest compounds.
Example: $10,000 at 8% for 3 years, compounded annually.
- Total ≈ $12,597
- Interest ≈ $2,597
That's about $197 more than simple interest — in just three years. Over decades, the difference is enormous.
Compounding frequency changes the result
With the same rate (8%) and term (3 years), compounding more often produces a slightly larger balance:
| Compounding |
Approx. total |
| Annual (1×) |
about $12,597 |
| Monthly (12×) |
about $12,702 |
The takeaway: for savings, more frequent compounding is a small bonus; for debt, it's a small penalty.
Where each one shows up
- Savings, deposits, and funds usually compound — which is why starting early and staying invested matters so much.
- Credit cards and many loans compound too, so an unpaid balance can snowball.
- Some short-term or informal loans use simple interest.
The power of time
Because compounding builds on itself, time is the biggest lever — often bigger than the rate. The same monthly amount left to grow for 20 years can end up far larger than one left for 10, not twice as large. That's why "start now" beats "start big" for most long-term goals.
Conclusion
Simple interest is linear; compound interest curves upward as it earns on itself. Use the Interest Calculator above to compare the two and change the compounding frequency. To plan repayments, try the Loan Calculator, and for the math behind rates, the Percentage Calculator.
