Wraplet guide
Simple vs Compound Interest
Compare simple and compound interest, see the core formulas, and learn why compounding grows faster over time.
Simple interest
Simple interest is calculated only on the original principal. It grows in a straight line because earned interest does not earn more interest.
Simple interest = principal x rate x time.
Compound interest
Compound interest adds earned interest back into the balance, so future interest is calculated on a larger amount.
Compound interest uses A = P(1 + r/n)^(nt), where P is principal, r is annual rate, n is compounds per year, and t is years.
Frequently asked questions
Why does compound interest grow faster?
Because interest is added to the balance, each future period can earn interest on both the original money and previous interest.
Does monthly compounding beat yearly compounding?
With the same annual rate, monthly compounding usually produces a slightly higher final amount than yearly compounding.