How simple and compound interest work

Interest is compensation for using money over time. The difference between simple and compound interest is whether previously earned interest is added to the balance used for the next period.

The key distinction

With simple interest, the original principal remains the base. With compound interest, earned interest is added to the balance, so later periods can earn interest on earlier interest. The right comparison depends on the product terms, timing and fees.

Educational material is not individual investment, legal or tax advice.