Simple interest vs compound interest
Simple interest grows in a straight line. Compound interest curves upward. Here's when each one shows up.
3 min readReviewed Apr 1, 2026
Quick answer
Simple interest is calculated only on the original amount. Compound interest is calculated on the original amount plus all interest already earned.
Side by side
Simple interest
- Formula: I = P × r × t.
- Linear growth — same dollars added each period.
- Common in short-term loans, some bonds, and car loans.
- Easier to calculate by hand.
Compound interest
- Formula: A = P × (1 + r/n)^(n·t).
- Exponential growth — gets dramatic over decades.
- Common in savings accounts, investments, mortgages.
- More compounding periods = slightly faster growth.
When each one wins
If you're saving or investing, you want compound interest on your side. If you're borrowing, simple interest on a short term is usually cheaper than the equivalent compounded over years.
The longer the time horizon, the more these two diverge — by year 30, the gap is enormous.