Which is better for a saver?

Compound interest, because the balance earns interest on earlier interest.

Which is better for a borrower?

Simple interest costs less over the same rate and term, since interest is not charged on earlier interest.

Do loans use simple or compound interest?

Many instalment loans calculate interest on the outstanding balance each month, which is close to simple interest on a shrinking balance. Credit cards usually compound. Check your agreement.

Money basics

Simple vs Compound Interest: Why the Gap Grows

The two methods look identical in year one and then drift apart. Time is what makes compounding matter.

By Editorial Team · Updated September 19, 2026 · 1 min read

Interest can be calculated in two ways, and the difference explains a lot about how savings grow and how debts become expensive.

Simple interest

Simple interest is charged only on the original amount, the principal.

Simple interest = principal × rate × years
Final amount    = principal × (1 + rate × years)

Put 1,000 at 5% for 10 years and you earn 50 a year, so 500 in total, for a final amount of 1,500.

Compound interest

Compound interest is charged on the principal and on interest already added.

Final amount = principal × (1 + rate)^years

With annual compounding, the same 1,000 at 5% grows to 1,000 × 1.05^10 = 1,628.89 after 10 years. That is 128.89 more than simple interest.

Why the gap grows

In year one both methods give 50. In year two, simple interest earns 50 again, but compound interest earns 5% of 1,050, which is 52.50. Each year the base is bigger, so the interest is bigger, and the gap widens faster the longer the money stays invested.

Years	Simple interest	Compound interest
1	1,050.00	1,050.00
10	1,500.00	1,628.89
20	2,000.00	2,653.30
30	2,500.00	4,321.94

After 30 years, the compound amount is more than 1.7 times the simple one.

The same effect works against you

Debts also compound. A credit card balance that is not paid off grows as interest is added to the balance and then charged interest itself. That is why paying down high-interest debt early is so effective, and why small differences in rate matter over long periods.

What to check in practice

How often interest is added. Monthly or daily compounding gives slightly more than yearly at the same rate.
Whether the rate is nominal or effective. An effective annual rate already includes compounding.
Fees and taxes, which reduce what you actually keep.

For a hands-on comparison, use the compound interest calculator, which also shows the simple-interest result.

Frequently asked questions

Which is better for a saver?: Compound interest, because the balance earns interest on earlier interest.
Which is better for a borrower?: Simple interest costs less over the same rate and term, since interest is not charged on earlier interest.
Do loans use simple or compound interest?: Many instalment loans calculate interest on the outstanding balance each month, which is close to simple interest on a shrinking balance. Credit cards usually compound. Check your agreement.

About the author

Editorial Team. The Editorial Team writes, checks and maintains every tool and guide on this site. The calculation logic behind the calculators is covered by automated tests, examples are worked out and re-checked before publishing, and pages are updated when we find a mistake or a rule changes. Corrections are welcome through the contact page.

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