Simple Interest vs Compound Interest
Understand the difference between simple and compound interest and how each grows money.
Published 2026-02-10
In this guide
Short answer
Simple interest is calculated only on the principal and grows linearly. Compound interest adds interest to the principal, so interest earns interest and grows exponentially.
Simple interest
Formula: principal ร rate ร time. It is predictable and common for short-term loans and bonds.
Compound interest
Formula: A = P ร (1 + r/n)^(nยทt). It grows faster, especially over long periods, and is used for most investments and savings.
Which to use
For borrowing short-term, simple interest is common. For investing long-term, compounding produces much larger returns, so it usually benefits the investor.