Simple Interest Calculator

A straight line rather than a curve

Simple interest grows linearly. Each period you earn or owe the same amount, calculated always on the original principal, and the interest already accrued plays no further part. Ten thousand at 5% simple interest yields exactly five hundred every year, forever — year one, year twenty, identical. Compound interest, by contrast, folds each period's interest back into the balance, so the base grows and the interest grows with it, tracing an accelerating curve. Over one or two years the two are nearly indistinguishable and simple interest is a perfectly reasonable approximation. Over twenty years the curve pulls decisively away from the line, and treating one as the other will mislead you badly.

Check which one your agreement actually uses

The distinction is not academic, because it changes what you owe or earn, sometimes by a great deal. Loan agreements, deposit accounts and bond terms all specify their method, and the specification is frequently buried in language designed not to be read. Ask directly, and ask about frequency too: interest compounded monthly at a given annual rate costs more than the same rate compounded annually. Regulators require lenders to publish an APR precisely so that borrowers can compare like with like across products that compound differently. When two offers show the same headline rate and different APRs, the difference is compounding, and the APR is the number that tells you the truth.