Simple Interest is interest is earned only on principal.
Example: Compute simple interest on $100 invested at 6% per year for three years.
1st year interest is $6.00
2nd year interest is $6.00
3rd year interest is $6.00
Total interest earned: $18.00
Compound Interest is when interest paid on an investment during the first period is added to the principal; then, during the second period, interest is earned on the new sum (that includes the principal and interest earned so far) and so on. In simple interest calculation, interest is earned only on principal.
Compound Interest
Example: Compute compound interest on $100 invested at 6% for three years with annual compounding.
1st year interest is $6.00 Principal is $106.00
2nd year interest is $6.36 Principal is $112.36
3rd year interest is $6.74 Principal is $119.11
Total interest earned: $19.10
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