About the Interest Calculator
This calculator computes either simple or compound interest on a principal amount, letting you compare the two directly. The difference between them is the single most important concept in personal finance, and it grows dramatically with time.
The formula
Simple: A = P(1 + rt) Compound: A = P(1 + r)ᵗP is the principal, r the annual rate as a decimal, and t the time in years. Simple interest applies the rate only to the principal; compound interest applies it to the growing balance.
How to use this calculator
- 1Enter your Principal ($). The field starts at
10000, which you can overwrite. - 2Enter your Annual Interest Rate (%). The field starts at
5, which you can overwrite. - 3Enter your Time (Years). The field starts at
5, which you can overwrite. - 4Enter your Type (1=Simple, 2=Compound). The field starts at
2, which you can overwrite. - 5Read the result straight away — it recalculates as you type, so there is no button to press. Use Share to copy a link that reopens the page with your exact numbers filled in.
Worked example
| Input | Value |
|---|---|
| Principal ($) | 10000 |
| Annual Interest Rate (%) | 5 |
| Time (Years) | 5 |
| Type (1=Simple, 2=Compound) | 2 |
Result
Interest Earned: $2,762.82
Total Value: $12,762.82
Those are the values the page loads with, so you can reproduce this result yourself and then change one field at a time to see what drives the outcome.
Understanding your result
Over short periods the two are close. Over long ones they diverge sharply: 10,000 dollars at 5 percent for five years yields 12,500 simple and 12,763 compound — a modest gap. Extend that to thirty years and simple gives 25,000 while compound gives 43,219.
Which one applies depends on the instrument. Most car loans, personal loans, and mortgages charge simple interest on the outstanding balance, recalculated each period. Savings accounts, investments, and credit card debt compound. Knowing which you are dealing with determines whether time is working for you or against you.
Things worth knowing
- Credit card debt compounds, often daily, which is why balances grow so quickly when unpaid.
- Most instalment loans use simple interest on the declining balance, so extra payments reduce total interest directly.
- Compare quoted rates as APY rather than APR when saving, since APY includes compounding.
- The effective annual rate is what actually matters. A nominal rate without its compounding frequency is incomplete information.
- For borrowing, prefer simple interest. For saving, prefer compound — and prefer it compounding often.
Frequently asked questions
Which is better, simple or compound interest?+
It depends which side you are on. Compound interest is better when you are earning it and worse when you are paying it, and the gap widens the longer the term runs.
Do loans use simple or compound interest?+
Most mortgages, car loans, and personal loans charge simple interest on the outstanding balance. Credit cards compound, usually daily, which is a large part of why card debt escalates.
How much difference does compounding make?+
Very little over one year, but substantial over decades. At 5 percent over thirty years, compound interest produces roughly 73 percent more total return than simple interest on the same principal.
What is the effective annual rate?+
The rate including the effect of compounding within the year. A nominal 12 percent compounded monthly gives an effective rate of about 12.68 percent, which is the figure to compare across products.