Simple Interest vs Compound Interest: What's the Difference?

Simple interest and compound interest in one sentence

Simple interest is calculated only on the original amount. Compound interest is calculated on the original amount plus interest that has already been added.

That one difference means simple interest normally grows in a straight line, while compound interest can accelerate over time.

Want to try the idea yourself? Use the Compound Interest Calculator.

A £1,000 example

At 5% simple interest, £1,000 earns £50 every year. After five years, the total is £1,250.

At 5% compound interest calculated annually, the first year also adds £50, but later years calculate 5% on the growing balance. After five years, £1,000 becomes about £1,276.28.

If you want to explore this topic further, see What Is Compound Interest and How Does It Work?.

Why the gap gets larger over time

In the early years, simple and compound interest can look very similar. With compounding, however, previous interest starts generating additional interest. The longer the period, the more opportunity there is for that effect to build.

Higher rates and more frequent compounding can widen the difference further.

Where you may see each type

Different savings products, investments and loans calculate interest in different ways. Some products use straightforward simple-interest calculations, while many savings and borrowing products effectively compound interest over time.

Do not assume the headline rate tells you everything. Check how and when interest is calculated and added.

How to compare the numbers

When comparing two options, use the same starting amount, rate and time period. That makes it much easier to see whether compounding is materially changing the outcome.

The Compound Interest Calculator can model compound growth quickly, while the guide to what compound interest is explains why the balance changes from one period to the next.