What Is the Difference Between Compound and Simple Interest?

By Staff WriterLast Updated December 08, 2023

The difference between simple interest and compound interest is that simple interest builds only on the principal amount, while compound interest builds on both the principal and previously earned interest. Because of this, compound interest always yields greater profits.

Simple interest can be calculated with the formula I = p× r × t, where “I” is interest, “p” is principal, “r” is the rate of interest and “t” is the amount of time. Compound interest can be calculated using the same formula. However, the amount of interest earned each year will be added to “p” to create a new principal, which grows larger every year.