How does simple interest differ from compound interest? You earn simple interest in a savings account and compound interest on an investment.

Simple interest rates are between 1-5% while compound interest rates are over 5%.

Simple interest is calculated on the principal as well as the interest you’ve already earned; compound interest is calculated on principal alone.

Simple interest is calculated on principal alone; compound interest is calculated on the principal as well as the interest you’ve already earned.

Simple interest is calculated on principal alone; compound interest is calculated on the principal as well as the interest you’ve already earned.

Explanation:

Simple interest remains a constant amount throughout the life of the loan or deposit. The amount does not change because it is calculated based on the principal amount only. As long as the principal amount is unchanged, the simple interest amount will remain the same.

Compounding refers to the adding of interest earned to the principal amount. At the end of a financial period, the interest earned is added to the principal.  In the next period, the principal amount will be higher due to the interest earned added. An increase in the principal amount results in higher interest earnings.

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