Compare simple interest and compound interest — how they work, which earns more, and when each is used.
Simple interest and compound interest are two ways of calculating interest on loans and investments. Simple interest is calculated only on the principal amount, while compound interest is calculated on both the principal and accumulated interest. Over time, compounding creates exponential growth, making it a powerful tool for long-term investing.
| Feature | Interest Calculator | Compound Interest Calculator |
|---|---|---|
| Formula | A = P(1 + rt) | A = P(1 + r)^t |
| Growth Pattern | Linear | Exponential |
| Interest on Interest | No | Yes |
| Same Principal & Rate | Lower returns | Higher returns |
| Common Uses | Car loans, short-term loans, bonds | Investments, savings accounts, credit cards |
| Best For | Short-term borrowing | Long-term investing |
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For investors, compound interest is better because it grows money faster. For borrowers, simple interest means lower total interest paid over the loan term.
Interest can be compounded daily, monthly, quarterly, half-yearly, or annually. More frequent compounding results in higher effective returns.
The Rule of 72 estimates how long it takes to double your money with compound interest: divide 72 by the annual rate. At 8%, money doubles in about 9 years.