The difference in one sentence
Simple interest is always calculated on the initial capital. Compound interest is calculated on the initial capital plus all interest already accumulated, so each period the interest is applied on a larger base.
The formulas
Simple interest: Final = Capital × (1 + r × t). Growth is a straight line.
Compound interest: Final = Capital × (1 + r/n)n·t. Growth accelerates over time, because interest generates more interest in turn.
A numeric example
Suppose €10,000 at 6% annual interest for 20 years, with no additional contributions:
| Years | Simple interest | Compound interest |
|---|---|---|
| 5 | €13,000 | €13,382 |
| 10 | €16,000 | €17,908 |
| 15 | €19,000 | €23,966 |
| 20 | €22,000 | €32,071 |
At first the difference is small. From around year 10-15 it starts to become clearly noticeable, and by year 20 compound interest is nearly €10,000 ahead of simple interest, on the same capital and the same rate.
When is each one used?
- Simple interest: some short-term loans, treasury bills, or quick calculations over just a few months.
- Compound interest: savings accounts, investment funds, pension plans, most mortgages (with some nuances), and virtually any product designed for several years.
In practice, when someone talks about "growing" their money long-term, they're almost always referring to compound interest: it's what's behind phrases like "compound interest is the eighth wonder of the world".
Check it with your own numbers
The best way to internalize this difference is to play with real figures. In the calculator you can compare three compound interest scenarios at once and see how the result changes depending on the rate and term.