Simple Interest vs Compound Interest: What's the Difference

Simple interest and compound interest both calculate what you earn (or owe) on a principal amount over time, but they diverge quickly once more than one period is involved — and the gap between them grows every year.

Simple interest: the same amount, every period

Simple interest is calculated only on the original principal, every single time — it never earns interest on previously-earned interest. The formula is straightforward: Interest = Principal × Rate × Time / 100. A ₹1,00,000 deposit at 8% simple interest earns exactly ₹8,000 every year, for as many years as it runs — flat, predictable, and easy to calculate by hand.

Compound interest: interest on interest

Compound interest adds each period's interest back into the principal before calculating the next period's interest — so the base amount grows every period, and later periods earn interest on a larger number than earlier ones. The formula is Amount = Principal × (1 + Rate/n)^(n × Time), where n is how many times per year it compounds. The same ₹1,00,000 at 8%, compounded yearly, earns ₹8,000 in year one — but by year five, it's earning interest on ₹1,36,049, not ₹1,00,000, so the annual interest amount itself keeps climbing.

Side by side: ₹1,00,000 at 8% for 5 years

• Simple interest: ₹40,000 total interest, ending balance ₹1,40,000
• Compound interest (yearly): ₹46,933 total interest, ending balance ₹1,46,933
• The gap — ₹6,933 here — grows larger the longer the money sits and the more frequently interest compounds

Step-by-step: compare both for your own numbers

1. Open the Calculator Hub and check the Simple Interest tab with your principal, rate and years.
2. Switch to the Compound Interest tab, enter the same figures, and pick a compounding frequency (yearly, half-yearly, quarterly or monthly).
3. Compare the two "total amount" results directly.

Which one applies to you

Most everyday borrowing — home loans, personal loans, credit cards — uses compound interest, which is why paying only the minimum for a long time costs so much more than the sticker rate implies. Simple interest shows up in some fixed-term loans and older-style deposit products. Always check which one a specific product actually uses before assuming the numbers work out the way a quick mental estimate suggests.