Simple Interest vs. Compound Interest
Simple Interest (SI)
Compound Interest (CI)
Simple Interest vs. Compound Interest Calculator
Understanding how interest accrues is essential for managing loans and growing investments. The Simple Interest vs. Compound Interest Calculator allows you to compare linear growth against exponential compounding in real time to see how time and rate impact your total returns.
Key Metrics Calculated
Principal Amount ($P$): The initial sum of money invested or deposited.
Simple Interest (SI): Interest calculated exclusively on the original principal balance.
Compound Interest (CI): Interest calculated on both the initial principal and the accumulated interest from previous periods.
Compounding Gain: The extra wealth generated purely by earning interest on top of interest.
Core Formulas
Key Differences at a Glance
| Feature | Simple Interest | Compound Interest |
| Calculation Base | Principal amount only | Principal + accumulated interest |
| Growth Pattern | Linear (constant year-over-year) | Exponential (accelerates over time) |
| Common Uses | Auto loans, short-term personal loans | Mutual funds, stock market, savings accounts |
| Wealth Impact | Predictable, fixed growth | Higher total yield over long time horizons |
Frequently Asked Questions
Why does compound interest outperform simple interest over time?
Simple interest yields the exact same payout every year because it only calculates returns on your starting balance. Compound interest reinvests your annual earnings, allowing next year's interest to be calculated on a larger base amount.
What is the Rule of 72 in compound interest?
The Rule of 72 is a quick shortcut to estimate how many years it takes to double your investment at a fixed interest rate. Divide 72 by your annual return rate ($R$):
For example, at a $10\%$ annual rate, your money doubles in approximately $7.2$ years.