1How simple interest works
Simple interest is calculated on the original principal for the entire period. The interest amount grows at a constant rate when the principal and rate do not change.
2How compound interest works
Compound interest adds earned or charged interest to the balance at defined intervals. Future interest is then calculated on the updated amount.
3Why time makes the gap larger
For short periods and low rates, the difference may look small. Over longer periods, compounding can create a much larger gap.
4Compounding frequency matters
Monthly, quarterly and annual compounding can produce different outcomes even at the same stated annual rate. Always check the frequency.
5Compare effective outcomes
Do not compare products only by headline rates. Review maturity value, total repayment, fees, taxes and the exact calculation method.
Practical checklist
- Identify the interest method
- Check compounding frequency
- Compare total outcome
- Include fees and taxes
- Use the same time period
Frequently asked questions
Is compound interest always better?
It benefits savers when earning returns, but it can increase borrowing cost when charged on debt.
Does a higher compounding frequency increase value?
With the same nominal rate, more frequent compounding generally increases the final amount slightly.
Why do two products with the same rate differ?
Frequency, fees, timing and calculation conventions may differ.
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