Simple interest vs compound interest
Simple interest calculates interest only on the original principal. Compound interest adds interest to the balance, so future interest can be earned or charged on earlier interest.
Example
For $1,000 at 5% annual simple interest for 3 years, interest is $150 and the total amount is $1,150 before any extra fees.
Common mistakes
Convert months to years before using a yearly rate. Six months is 0.5 years in the simple-interest formula.
When this estimate is useful
Use it for quick checks where the agreement actually uses simple interest. Do not use it for credit cards, amortized loans or savings products that compound or use daily balances.
References
- Investor.gov: Compound interest - contrast with compounding, accessed 2026-05-17.
Last reviewed: 2026-05-17