Interest is the price of borrowing money — or the reward for lending it.
Slide principal, rate and years
compound → $1,629 (+$629 interest)simple → $1,500 (+$500)compounding earns $129 extra
compound: A = P(1 + r)ᵗ · simple: A = P(1 + r·t)
Two flavours of interest
- Simple interest — earned only on the original principal: I = P · r · t.
- Compound interest — earned on principal *and* past interest, so it snowballs.
- Savings accounts and loans almost always compound.
- The longer the time and the higher the rate, the bigger the gap between the two.
Try it
$1,000 at 5% per year for 10 years, compounded annually
1000 × 1.05¹⁰ ≈ $1,628.89 — vs $1,500 with simple interest.
Rule of 72: divide 72 by the interest rate to estimate how many years it takes money to double. At 6%, about 12 years.
Interest rates are usually quoted as APR (Annual Percentage Rate) — the rate per year.