Simple vs Compound Interest Calculator
Compare simple and compound interest side by side
Simple Interest
₹40,000
Total: ₹1,40,000
Compound Interest
₹46,933
Total: ₹1,46,933
Compound Interest earns extra
₹6,933
more than Simple Interest over 5 years
Rule of 72
At 8% rate, your money doubles in approximately 9.0 years with compound interest.
Effective Annual Rate (EAR)
8.000%
vs nominal 8% with annually compounding
Year-wise Comparison
| Year | Simple Interest Balance | Compound Interest Balance | CI Advantage |
|---|---|---|---|
| Year 1 | ₹1,08,000 | ₹1,08,000 | +₹0 |
| Year 2 | ₹1,16,000 | ₹1,16,640 | +₹640 |
| Year 3 | ₹1,24,000 | ₹1,25,971 | +₹1,971 |
| Year 4 | ₹1,32,000 | ₹1,36,049 | +₹4,049 |
| Year 5 | ₹1,40,000 | ₹1,46,933 | +₹6,933 |
Simple Interest vs Compound Interest — The Complete Guide
Understanding the difference between simple and compound interest is one of the most fundamental concepts in personal finance. This knowledge helps you make better decisions about loans, investments, and savings — and can literally make the difference of lakhs of rupees over your lifetime.
Simple Interest — The Basics
Simple interest is calculated only on the original principal amount, regardless of how much interest has accumulated. The formula is: SI = (P × R × T) / 100. If you invest ₹1 lakh at 8% simple interest for 5 years, you earn ₹8,000 per year, totaling ₹40,000 in interest. The interest amount is the same every year.
Compound Interest — The Magic of Compounding
Compound interest is calculated on the principal plus all previously accumulated interest. The formula is: A = P × (1 + r/n)^(n×t). With the same ₹1 lakh at 8% compounded annually for 5 years, you earn ₹46,933 — ₹6,933 more than simple interest. The difference grows dramatically over longer periods.
The Power of Compounding Over Time
Albert Einstein reportedly called compound interest the "eighth wonder of the world." Here's why: ₹1 lakh at 12% compound interest grows to ₹3.1 lakh in 10 years, ₹9.6 lakh in 20 years, and ₹29.9 lakh in 30 years. The same amount at 12% simple interest grows to only ₹2.2 lakh, ₹3.4 lakh, and ₹4.6 lakh respectively. The gap is staggering.
Compounding Frequency Matters
The more frequently interest is compounded, the higher the effective return. For a 12% nominal rate: annual compounding gives 12% EAR, quarterly gives 12.55%, monthly gives 12.68%, and daily gives 12.75%. While the differences seem small, they compound significantly over long periods.
When Simple Interest Works in Your Favor
As a borrower, simple interest loans are cheaper. Car loans and some personal loans use simple interest (reducing balance method), which means you pay less total interest compared to compound interest loans. Understanding this helps you choose the right loan product.
Practical Applications
- FD and RD: Use compound interest (quarterly compounding) — good for investors
- PPF: Compound interest annually — excellent for long-term savings
- Home Loans: Reducing balance (similar to compound) — understand total interest cost
- Credit Cards: Compound interest monthly at 36–42% p.a. — avoid revolving credit
- Mutual Funds: Returns compound over time — stay invested for maximum benefit