Quick answer
An interest calculator computes simple and compound interest on the same principal so you can compare them. On $20,000 at 6% for 5 years, simple interest pays $6,000; compound interest, credited monthly, pays $6,977 — the $977 gap is interest earned on interest, and it widens every year.
How the Interest Calculator works, step by step
Enter the principal, any monthly contribution, the annual rate, the term and how often interest compounds. The calculator returns the interest earned and the final amount under both methods, side by side, with a chart tracking the two balances year by year so the gap is visible rather than abstract.
Simple interest is charged or paid only on the original principal, so it grows in a straight line — the same dollar amount every year. In this tool the simple leg accrues on deposited principal only, never on past interest, so monthly contributions add to the base but the interest they earn does not itself earn interest. That linearity is the method's signature: the interest column in the year-by-year table rises by the same dollar amount every year, while the compound column's yearly interest grows.
Compound interest is calculated on principal plus accumulated interest, so it accelerates. The tool converts your chosen frequency into an effective monthly rate: with monthly compounding selected, a 6% nominal rate credits 0.5% each month. At 6% nominal, the effective annual yield is 6.00% compounded annually, 6.14% quarterly, 6.17% monthly and 6.18% daily — the whole frequency range is worth 18 basis points, while a single point of rate is worth far more.
The method is written into the product terms. Savings accounts, money market accounts and CDs compound, and banks quote APY so you can compare them directly. Most consumer loans — mortgages, auto loans, personal loans — charge simple interest on the outstanding balance. Credit cards effectively compound, because unpaid interest is added to the balance each cycle.
Use the comparison to judge offers, but read the whole offer. A deposit quoted with monthly compounding beats the same rate compounded annually, and a loan quote means little until you know the method and the fees. Fees are captured by APR, not by the interest rate, so two loans at the same rate can cost very different amounts.
The formula
Simple: A = P × (1 + r × t). Compound: A = P × (1 + r/n)^(n×t), where P is principal, r the annual rate, t the years and n the compounding periods per year. Monthly contributions compound from the month they are made.
Worked example — try it on the calculator above
Worked example: $20,000 at 6% for 5 years
Simple interest: $20,000 × 6% × 5 = $6,000 of interest, final amount $26,000. Compound interest, credited monthly: $20,000 × (1 + 0.06/12)^60 = $26,977, so interest is $6,977. Over 5 years the methods differ by $977. Stretch the term to 20 years and simple interest pays $24,000 while monthly compounding pays about $46,204 — the gap widens from under $1,000 to more than $22,000, which is why the method matters far more over decades than over months.
Frequently Asked Questions
Which bank accounts pay compound interest?
Almost all of them. Savings accounts, money market accounts and CDs credit interest to the balance, and later interest is calculated on the higher balance. Banks quote APY, which is the compounded rate, so you can compare accounts directly without doing the frequency maths yourself.
Do loans use simple or compound interest?
Most consumer loans — mortgages, auto loans, personal loans — use simple interest calculated on the outstanding balance, which falls as you pay. Credit cards effectively compound because unpaid interest is added to the balance each cycle, so carrying a balance costs more than the stated rate suggests.
What does compounding daily versus monthly change?
Very little at normal rates. A 6% nominal rate becomes about 6.17% effective with monthly compounding and about 6.18% with daily compounding. Rate and term matter far more than frequency — on $20,000 over 5 years, the daily-versus-monthly difference is only a few dollars.
Why do two calculators give different answers for the same inputs?
Usually the compounding frequency or the timing of deposits differs. Check whether interest is credited monthly or annually and whether a deposit is assumed at the start or the end of each period. Both change the result by small, explainable amounts — the method, not an error, is usually the cause.
Estimates, not advice. This calculator provides educational estimates based on the inputs you enter and the assumptions shown on this page. It is not financial, tax or investment advice, and it cannot see your full situation. Verify important figures against official sources, and consider a qualified professional for decisions about your own money. See our Disclaimer and Methodology.