Simple interest vs compound interest
Simple interest is charged only on the original amount. Compound interest is charged on the original amount plus the interest already added, so it grows faster the longer you leave it. Savings accounts, fixed deposits and most loans use compound interest. Some short-term personal and gold loans use simple interest.
Compound: A = P × (1 + r ÷ m)m × t P is the principal, r is the yearly rate as a decimal, t is the time in years and m is how many times a year interest is added.
Worked example
What makes compounding work harder
- Time. The longer the money stays invested, the bigger the gap from simple interest.
- Rate. A higher rate lifts the whole curve, and the gap grows faster.
- Frequency. Monthly compounding earns slightly more than yearly. The jump from monthly to daily is small.
Frequently asked questions
Which is better for me, simple or compound?
If you are investing, compound interest is better because you earn interest on interest. If you are borrowing, simple interest is better because you pay interest only on the original amount.
How often do Indian banks compound FD interest?
Most bank FDs compound quarterly. Post office schemes often compound yearly. Check the terms of your own deposit.
What is the rule of 72?
Divide 72 by the yearly rate to estimate how many years it takes to double your money with compounding. At 9%, money doubles in about 8 years.
What is the effective annual rate?
It is the true yearly return after compounding. A 8% rate compounded quarterly gives about 8.24% effective return.
Does this work for loans too?
Yes. Enter the loan amount as the principal to see how much interest builds up if nothing is repaid. For regular repayments, use the EMI calculator.