What’s the Difference Between Simple and Compound Interest?

Calculator with money

Whether you’re applying for a personal loan, auto loan, mortgage, etc., there is one common denominator: As a borrower, you will have to pay interest (on top of your monthly payments). You can think of interest as the cost of borrowing money. It can be simple or compounded, leading many to wonder, what is the difference between simple and compound interest? Learn more with Xpress Cash below, where we’ll cover the definitions of simple and compound interest, and more!

What Does Simple Interest Mean?

Aptly named, many folks find that simple interest is easier to understand than compound interest. Simple interest is based solely on the principal amount of a loan (the total amount being borrowed). Typically, simple interest is applied to auto loans or short term loans. When making a payment on a simple interest loan, the money is first applied to that month’s interest, while the rest is applied to the total principal. Each month’s interest is to be paid in full, meaning it does not accrue over time. Compound interest, on the other hand, does accrue over time, which we’ll talk more about below.

What Does Compound Interest Mean?

Compound interest is based on your initial principal amount, plus the accumulated interest of previous periods. Essentially, compound interest can be viewed as “interest on interest.” The interest can be compounded by varying frequencies, be it daily, monthly, annually, etc., but the number of compounding periods can make a significant difference to the money paid or the money earned. 

The more compounding periods there are, the greater the compound interest will be. So, $100 compounded annually at a 10% interest rate will accrue less money than $100 compounded semi-annually at a 5% interest rate.

How to Get Compound Interest

Depending on your position, compound interest can put you at an advantage or a disadvantage. If you’re depositing money into a savings account with a bank, compound interest can help you earn more over time. But if you’re a borrower taking out a loan, compound interest will have you paying more money overall to your lender. 

Want to know more about how to get compound interest and increase your money earned? The most common avenue is through a savings account with your bank. Your checking account will likely not be helpful here, as most checking accounts – if they earn interest at all – earn a lot less interest than savings accounts. 

Learn More at Xpress Cash Today

When you dive deeper into the differences between simple and compound interest, you might feel a bit overwhelmed. If you have any remaining questions or would like to seek further advice on how to get compound interest, you can count on the team at Xpress Cash! Don’t hesitate to contact us online or pay us a visit at one of our multiple Michigan locations to get started today.