Simple interest calculator: Compare simple and compound interest
With simple interest, the interest is always calculated on the original amount. If you put 100,000 at 5% simple interest, you earn 5,000 per year. Interest earned earlier does not itself earn interest in this model.
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The calculator puts simple interest and compound interest side by side. You use the same amount, rate and term and see the difference in money.
How simple interest is calculated
Total interest = starting amount × annual rate × number of years. If you add the starting amount, you get the capital and the interest earned together.
The model can be used to understand an interest calculation or to see what it means to withdraw the interest along the way. If the interest is paid out every year, it no longer stays in the original account. The result is then the sum of the capital and the payments received.
Same rate, different final amount
With 100,000, 7% and 20 years, the simple interest is 140,000. Capital and interest therefore total 240,000.
With annual interest and compounding, the amount is instead 386,968.45. The difference of 146,968.45 comes from earning interest on interest added earlier.
When is the comparison useful?
It shows what happens when returns are left to grow instead of being taken out. The example assumes that the interest paid out is not invested or earning interest elsewhere. Tax and fees are not included either.
For stocks, the equivalent question is often whether the dividend is spent or reinvested. You can explore that in the dividend reinvestment calculator, where price growth and dividends are entered separately.