Overview
Simple interest is calculated only on your original principal. Compound interest is calculated on your principal plus all previously earned interest, creating a snowball effect that accelerates growth over time.
Use the Simple Interest Calculator for straightforward loan or bond calculations, and the Compound Interest Calculator to see the exponential growth potential of reinvested earnings.
Key Differences
**Formula:** Simple interest = Principal x Rate x Time. Compound interest applies the rate to an ever-growing balance.
**Growth pattern:** Simple interest grows linearly. Compound interest grows exponentially.
**Impact of time:** The longer the time period, the bigger the gap between simple and compound results. Over 30 years, compound interest can produce dramatically higher returns.
**Where each applies:** Simple interest is common in car loans, short-term personal loans, and some bonds. Compound interest drives savings accounts, investment accounts, and most credit card debt.
**Frequency matters:** Compound interest results depend on how often interest compounds -- daily, monthly, quarterly, or annually.
When to Use the Simple Interest Calculator
- You have a car loan or personal loan that uses simple interest - You are calculating interest on a short-term investment or promissory note - You need a quick estimate of interest cost without compounding effects - You are evaluating Treasury bills or certificates that pay simple interest - You want to understand the baseline interest cost before comparing with compound alternatives
When to Use the Compound Interest Calculator
- You want to project savings or investment growth over many years - You are evaluating how much credit card debt will really cost you - You want to see the impact of different compounding frequencies (daily, monthly, annually) - You are planning for retirement and want to see how reinvested returns accelerate growth - You want to compare lump-sum investing versus regular contributions with compounding
Frequently Asked Questions
Q: How big is the difference between simple and compound interest? A: On $10,000 at 7% over 30 years, simple interest yields $21,000 while compound interest yields about $76,000 -- more than triple.
Q: Do banks use simple or compound interest? A: Most savings accounts and CDs use compound interest. Most auto loans and some personal loans use simple interest.
Q: Does compounding frequency matter much? A: Yes. Daily compounding earns more than annual compounding, though the difference shrinks as rates decrease. At 5%, daily versus annual compounding adds about 0.13% per year.
Q: Is compound interest always good? A: It is great for savings and investments, but it works against you on debt. Credit card balances compound daily, which is why they grow so fast.
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