Simple vs compound interest

Both calculate interest, but differently. The distinction is what the interest is applied to — and that small difference changes everything over the long run.

Simple interest

Interest always applies to the initial amount. The gain is the same each period — linear growth (a straight line).

I = P × r × t  and  Amount = P + I

Compound interest

Interest applies to the accumulated balance (interest on interest). Each period earns on a larger amount — exponential growth.

Amount = P × (1 + r)n

Side-by-side example

$1,000 at 1% per month:

Term	Simple	Compound
2 years	$1,240	$1,269
10 years	$2,200	$3,300
30 years	$4,600	$35,950

Small at first; over decades, a chasm. That's why compounding is the engine of long-term investing.

Where each appears

Most investments and loans use compound interest. Simple interest shows up in some short-term contracts and late-payment fees.

FAQ

Which is better for investors? Compound, no question — more so the longer the term.

And for borrowers? Simple hurts less. The more compounded and longer a debt, the more it grows.