Calculate simple and compound interest with a full breakdown.
| Year | Interest | Total Interest | Balance |
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Simple interest is straightforward — it is calculated only on the original principal amount for the entire duration. Compound interest, on the other hand, calculates interest on both the principal and the previously accumulated interest. Over time, compound interest results in significantly higher returns, which is why it is often called the "eighth wonder of the world."
Consider investing $10,000 at 5% annual interest for 20 years. With simple interest, you earn $10,000 in interest — giving you $20,000 total. With compound interest (compounded monthly), you end up with approximately $27,126 — an extra $7,126 just from compounding. The longer the time period, the greater the difference becomes.
APR (Annual Percentage Rate) does not account for compounding within the year. APY (Annual Percentage Yield) does account for compounding and reflects the true annual return. APY is always equal to or higher than APR.
More frequent compounding results in slightly higher returns. For example, $10,000 at 5% for 10 years: annually gives $16,289, monthly gives $16,470, and daily gives $16,487. The differences are small but add up over longer periods.
Simple interest is commonly used for short-term loans, car loans, and some personal loans. It is easier to calculate and more predictable than compound interest.