Money & everyday · 3 min read
Simple vs Compound Interest: The Difference in Numbers
Simple interest
I = P × r × t = 2,000 × 0.04 × 20 = 1600. The balance grows by the same 80 each year.
Compound interest
Each year’s interest is added to the principal, so next year’s interest is larger.
| Years | Simple | Compound (annual) | Difference |
|---|---|---|---|
| 1 | 2,080.00 | 2,080.00 | 0.00 |
| 5 | 2,400.00 | 2,433.31 | 33.31 |
| 10 | 2,800.00 | 2,960.49 | 160.49 |
| 20 | 3,600.00 | 4,382.25 | 782.25 |
| 30 | 4,400.00 | 6,486.80 | 2,086.80 |
Which applies where
Many savings accounts and loans use compounding; some short-term loans use simple interest. Always check the terms. For the full formula see compound interest explained.
Percent practice
One year of simple interest: 4% of 2,000
- 4% of 2000 is 80
Step-by-step working 2 steps
- 1Turn the percent into a decimal
4% = 4 ÷ 100 = 0.04
- 2Multiply by the number
0.04 × 2000 = 80
Frequently asked questions
Is compound interest always better?
For savings, yes; for debt, it works against you.
How do I calculate monthly interest?
Divide the annual rate by 12 for each monthly period, if the account compounds monthly.
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