Simple interest vs compound interest

The central difference

Simple interest is always calculated on the original principal. Compound interest is calculated on the accumulated balance, including previous returns.

Compare both methods

Use the same capital, annual rate and duration below. The comparison assumes no contributions, fees, inflation or taxes so that the compounding effect remains visible.

When each model is used

Simple interest describes situations where returns are not reinvested. Compound interest describes balances where returns stay invested. Loans also require an amortisation schedule and should not be assessed with this comparison alone.

Frequent mistakes

Compare like with like: the same effective rate, period and cash flows. Mixing nominal and effective rates can make the result misleading.

How to interpret the difference

The gap is not an extra guaranteed return. It isolates the mathematical effect of reinvesting returns under a constant rate. Real outcomes can differ because returns vary, costs and taxes apply, and money may enter or leave at different times.

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