Simple vs. Compound Interest: What's the Difference?

Learn why simple interest is good for borrowers, while compound interest works in your favor as an investor.

By Robin Hartill, CFP – Updated Sep 6, 2024 at 1:43 PM

Key Points

Simple interest is more favorable for borrowers due to its non-compounding nature.
Compound interest benefits investors by allowing earnings to also generate returns.
Invest in avenues like stocks where returns compound, maximizing wealth growth.

The difference between simple interest and compound interest is the way the interest accumulates. Simple interest accumulates only on the principal balance, while compound interest accrues to both the principal balance and the accumulated interest.

Simple interest works in your favor when you borrow money, while compound interest is better for you as an investor. As a borrower, simple interest is better because you're not paying interest on interest. It's easier to repay debt with simple interest. Compound interest can help you to build wealth over time because your earnings also earn money.

Loading paragraph...

Simple Interest

Money earned or paid only on the initial amount invested or borrowed, without added interest on interest over time.

Loading paragraph...

Compound Interest

Compound interest is what you get when you reinvest your earnings, which then also earn interest.

Best Stock Brokers for ##MONTH## ##YEAR##

Loading callout...

Loading paragraph...

While investors accept only simple interest from savings accounts, generating compound earnings is necessary to build enough wealth to retire. Avoid owing compound interest on debt in favor of debts with simple interest such as mortgages. Prioritize investments like stocks that enable your gains to compound over time.

Loading paragraph...

Related investing topics

Loading paragraph...

About the Author

Robin Hartill, CFP, is a contributing writer at The Motley Fool. Robin’s work has also been published by Yahoo Finance, USA Today, and Penny Hoarder. She is a graduate of the University of Florida.

TMFRobinHartill

The Motley Fool has a disclosure policy.