$10,000 at 5% for 30 years becomes $25,000 with simple interest and $43,219 with interest compounded yearly.
- Simple interest
- Compound interest
| Years | Simple interest | Compound interest | Difference |
|---|---|---|---|
| 1 | $10,500 | $10,500 | $0 |
| 2 | $11,000 | $11,025 | $25 |
| 3 | $11,500 | $11,576 | $76 |
| 4 | $12,000 | $12,155 | $155 |
| 5 | $12,500 | $12,763 | $263 |
| 10 | $15,000 | $16,289 | $1,289 |
| 15 | $17,500 | $20,789 | $3,289 |
| 20 | $20,000 | $26,533 | $6,533 |
| 25 | $22,500 | $33,864 | $11,364 |
| 30 | $25,000 | $43,219 | $18,219 |
| 40 | $30,000 | $70,400 | $40,400 |
How it is computed
Simple interest: balance = P × (1 + r × t), interest is earned on the original amount only. Compound interest: balance = P × (1 + r)^t, compounded once a year, so interest also earns interest.
FAQ
Where is simple interest used?+
On some short-term loans, car loans in some markets, bonds paying coupons that are not reinvested, and legal interest on judgments.
Why do the two lines barely differ at first?+
In the first years the interest on interest is small; the gap widens every year because it compounds on itself.