How to Use This Calculator
- Input initial balance: Enter your principal deposit.
- Set annual interest percentage: Input the advertised interest rate.
- Select duration in years: Observe how compounding pulls ahead as time expands.
Formula and Calculation Steps
Simple Interest: Total = P × (1 + r × t)
Compound Interest: Total = P × (1 + r)ᵗWorked Examples and Reference Table
| Years | Simple Total (5%) | Compound Total (5%) | Difference |
|---|---|---|---|
| 1 Year | $10,500.00 | $10,500.00 | $0.00 |
| 3 Years | $11,500.00 | $11,576.25 | +$76.25 |
| 5 Years | $12,500.00 | $12,762.82 | +$262.82 |
| 10 Years | $15,000.00 | $16,288.95 | +$1,288.95 |
| 20 Years | $20,000.00 | $26,532.98 | +$6,532.98 |
Frequently Asked Questions
What is simple interest?
Simple interest is calculated solely on the original principal amount deposited or borrowed: Interest = Principal × Rate × Time.
Why does compound interest yield more than simple interest?
Compound interest generates interest on interest previously earned, creating accelerating exponential growth rather than linear growth.
What types of accounts use simple interest?
Most short-term personal loans, auto loans, and certain treasury bills use simple interest. Savings accounts and certificates of deposit (CDs) almost always compound.
How do you calculate annual percentage yield (APY)?
APY accounts for compound frequency: APY = (1 + r/n)ⁿ - 1, representing the true annualized return on investment.
Can simple interest ever exceed compound interest?
No. For identical principal, nominal rates, and positive time periods, compound interest will always equal or exceed simple interest.