Simple vs Compound Interest: What's the Difference?
By Talcart · Last updated July 2, 2026
Simple interest grows only on the original principal (A = P(1 + r·t)); compound interest grows on principal plus accumulated interest (A = P(1 + r)^t). On $10,000 at 6%, that difference is worth $908 after 10 years and $29,435 after 30. The tables below show the exact gap year by year and rate by rate.
What is the difference between simple and compound interest?
Simple interest is calculated only on the original principal, so it grows by the same dollar amount every year: A = P(1 + r·t). Compound interest is calculated on the principal plus all interest already earned, so growth accelerates: A = P(1 + r)^t. In year one the two are identical; every year after that, compounding pulls further ahead.
$10,000 at 6%: simple vs compound, year by year
After one year both methods produce the same $10,600. By year 10 compounding is ahead by about $908, by year 20 by about $10,071, and by year 30 the compound balance is more than double the simple-interest balance in gained interest.
| Time invested | Simple interest | Compound (annual) | Compounding advantage |
|---|---|---|---|
| 1 year | $10,600 | $10,600 | $0 |
| 5 years | $13,000 | $13,382 | $382 |
| 10 years | $16,000 | $17,908 | $1,908 |
| 15 years | $19,000 | $23,966 | $4,966 |
| 20 years | $22,000 | $32,071 | $10,071 |
| 25 years | $25,000 | $42,919 | $17,919 |
| 30 years | $28,000 | $57,435 | $29,435 |
Lump-sum $10,000, 6% per year, no contributions or withdrawals, rounded to the nearest dollar.
The gap widens faster at higher rates
Over a fixed 20-year horizon, the advantage of compounding grows disproportionately with the rate — at 4% it is worth about $3,911 per $10,000, but at 10% it is worth about $37,275.
| Annual rate (20 years) | Simple interest | Compound (annual) | Compounding advantage |
|---|---|---|---|
| 4% | $18,000 | $21,911 | $3,911 |
| 6% | $22,000 | $32,071 | $10,071 |
| 8% | $26,000 | $46,610 | $20,610 |
| 10% | $30,000 | $67,275 | $37,275 |
Where is each type actually used?
Simple interest appears in short-term personal loans, some auto loans, bonds’ coupon payments and many informal lending arrangements. Compound interest governs savings accounts, fixed deposits, credit cards, mortgages and investment growth. The practical rule: when you are the saver, compounding works for you; when you are the borrower, it works against you — which is why credit-card debt (compounding daily or monthly) grows so quickly.
Frequently asked questions
For savers and investors, compound interest is better — $10,000 at 6% for 30 years yields $57,435 compounded versus $28,000 with simple interest. For borrowers the reverse is true: a simple-interest loan costs less than one that compounds unpaid interest.
Only for the first period. At exactly one year (with annual compounding), both formulas give P(1 + r) — $10,600 on $10,000 at 6%. From the second period on, compound interest earns interest on prior interest and permanently pulls ahead.
Simple: A = P(1 + r·t) — $10,000 × (1 + 0.06 × 10) = $16,000 after 10 years. Compound: A = P(1 + r)^t — $10,000 × 1.06^10 = $17,908. The Simple Interest and Compound Interest Calculators handle any combination of rate, time and compounding frequency.
Savings accounts almost universally use compound interest, typically compounded daily or monthly and credited monthly or quarterly. The advertised APY (annual percentage yield) already includes the effect of compounding, which is why APY is slightly higher than the nominal rate.