Simple vs. compound interest
Simple interest grows in a straight line. Compound interest grows on itself. For borrowers, simple is cheaper; for savers, compound is better.
Updated October 30, 2026. Examples are calculated with the formulas shown on our formula page.
The difference in one example
$10,000 at 6% a year for 5 years, with nothing paid back along the way:
| Method | Formula | Interest |
|---|---|---|
| Simple | P × r × t | $3,000.00 |
| Compounded yearly | P × (1 + r)t − P | $3,382.26 |
| Compounded monthly | P × (1 + r/12)12t − P | $3,488.50 |
Where each one shows up
- Simple: most car loans, personal loans, mortgages and federal student loans.
- Compound: savings accounts, CDs, investments, and credit card balances you carry from month to month.
APR vs. APY
Loans quote APR, an annual rate that doesn’t include compounding. Savings quote APY, which does. A 6% rate compounded monthly is a 6.17% APY.