Compound Interest vs Simple Interest: Complete Guide (2026)
The difference between compound and simple interest is one of the most important concepts in finance. Compound interest earns returns on previous returns, creating exponential growth. Simple interest only earns on the original principal. Over time, this difference is dramatic.
Head-to-Head Comparison
| $10,000 at 7% | Compound Interest | Simple Interest | Difference |
|---|---|---|---|
| After 5 years | $14,026 | $13,500 | +$526 |
| After 10 years | $19,672 | $17,000 | +$2,672 |
| After 15 years | $27,590 | $20,500 | +$7,090 |
| After 20 years | $38,697 | $24,000 | +$14,697 |
| After 25 years | $54,274 | $27,500 | +$26,774 |
| After 30 years | $76,123 | $31,000 | +$45,123 |
| Formula | A = P(1+r/n)^(nt) | A = P(1+rt) | — |
| Growth Pattern | Exponential | Linear | — |
| Common Uses | Investments, savings | Some loans, bonds | — |
| Reinvestment | Returns earn returns | Only principal earns | — |
The Formulas Explained
Simple interest: A = P × (1 + r × t), where P is principal, r is annual rate, and t is time in years. It grows linearly — the same dollar amount each year. $10,000 at 7% earns $700/year, every year, regardless of accumulated interest.
Compound interest: A = P × (1 + r/n)^(n×t), where n is compounding frequency. With monthly compounding (n=12), interest earned each month is added to the principal, and the next month's interest is calculated on the larger base. Try our compound interest calculator to see the effect of different compounding frequencies.
Why Compound Interest Always Wins Long-Term
The magic of compound interest is the "snowball effect." In year 1, $10,000 at 7% earns $700 — identical to simple interest. But in year 2, compound interest earns $749 (7% of $10,700). By year 10, annual earnings reach $1,325. By year 30, you earn $4,983 in a single year — more than 7x the first year's earnings.
This exponential growth means small differences in rate or time horizon have enormous impacts. An extra 1% return (8% vs 7%) on $10,000 over 30 years yields $100,627 vs $76,123 — a 32% difference from just 1% more return. Starting 5 years earlier has an even larger effect.
When Simple Interest Applies
Simple interest is used in some financial products: car loans (simple interest on declining balance), some personal loans, certain bonds (coupon payments), and short-term lending. It is simpler to calculate and understand, making it useful for short-term, low-value calculations.
For any investment horizon beyond 1-2 years, compound interest is overwhelmingly more favorable for the investor. Conversely, simple interest loans are generally better for borrowers than compound interest loans.
Practical Tips for Investors
Maximize compounding by: (1) starting as early as possible — time is the most powerful variable, (2) reinvesting all dividends and interest, (3) choosing investments that compound frequently (savings accounts compound daily, most investments compound annually), and (4) minimizing fees that reduce the compounding base.
See our investment growth methodology for the detailed math behind all our compound interest calculations.
The Verdict
Winner: Compound Interest (for investors)
Compound interest is vastly superior for long-term investing. The difference grows exponentially: $45,123 more on a $10,000 investment over 30 years at 7%.
- After 30 years, compound interest yields 2.45x what simple interest produces.
- The "snowball effect" means year-30 compound earnings are 7x year-1 earnings.
- Even small rate differences are magnified dramatically by compounding.
- Simple interest favors borrowers; compound interest favors investors/savers.