Calculator comparison
Simple Interest vs Compound Interest
Simple interest uses the original principal. Compound interest also earns on previously credited interest. Compare the same rate, term and deposit timing.
Updated 16 October 2026 • Tools by Layna Editorial Team • General information
What earns interest?
Simple interest applies a rate to the original principal for the stated period. Compound interest adds credited interest to the balance, so later interest is calculated on a larger amount when the rate is positive and funds remain invested.
For principal P, annual rate r as a decimal and time t in years: simple-interest final balance = P × (1 + rt). For a constant nominal annual rate compounded n times a year, with no deposits or withdrawals: compound final balance = P × (1 + r/n)nt.
Worked example: identical principal, rate and term
Start with $1,000 at an illustrative 5% per year for 3 years, with no fees, tax, deposits or withdrawals.
| Method | Calculation | Final balance |
|---|---|---|
| Simple interest | 1,000 × (1 + 0.05 × 3) | $1,150.00 |
| Annual compounding | 1,000 × 1.05³ | $1,157.63 |
| Monthly compounding | 1,000 × (1 + 0.05/12)³⁶ | $1,161.47 |
With annual compounding, the balances after each year are $1,050, $1,102.50 and $1,157.625 before final rounding. The interest earned grows from $50 to $52.50 to $55.125 because the balance grows.
Deposits change the question
The formulas above compare interest methods on a single starting balance. The site’s compound-interest calculator additionally accepts regular monthly deposits. Its method applies monthly interest, then adds that month’s contribution at the end of the month.
A deposit added at month-end does not earn that same month’s interest. Beginning-of-month and end-of-month contributions therefore produce different totals. Compare models using the same opening balance, contribution amount, frequency and timing.
Check the rate description and product terms
A nominal rate and an effective annual rate are different descriptions. At a 5% nominal rate compounded monthly, the effective annual rate is (1 + 0.05/12)12 − 1, or about 5.12% before fees and tax.
The example rate is not a forecast or offer. Actual products can vary in rate, interest-crediting dates, withdrawal conditions and fees. Repeatedly compounding a hypothetical return does not make the return guaranteed, and a future dollar balance is not adjusted for inflation unless the model says so.
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Frequently asked questions
Does compound interest always produce more?
For the same positive rate, term and unchanged invested principal, repeated compounding produces more than simple interest. Different fees, rates or cash flows can change a real product comparison.
What should I enter for an annual 5% rate?
Use 5 in a field labelled percent. In a written formula, 5% is the decimal 0.05. Check whether the product quotes a nominal or effective rate.
Why do two compound-interest calculators disagree?
Common causes are different deposit timing, compounding frequency, rate definitions, fees, tax or rounding. Match those assumptions before comparing totals.
Sources and method
The worked figures are illustrative arithmetic. The references below explain the underlying definitions and limits.