Worked example 1
£1,000 at 5% simple interest for 3 years.
- 5% of £1,000 = £50 per year.
- £50 × 3 = £150 interest.
- Total £1,150.
Answer: £1,150
Financial Literacy · Intermediate
Simple and compound interest explained
Interest is money paid for using money. Savings earn interest; loans and credit cards charge it. Compound interest — interest on interest — makes a big difference over time.
- 1Learn it
- 2See it worked
- 3Try it online
- 4Print it
- 5Check your answer
Before you start
Who it's for and what to know first
Percentages of amounts and using a calculator.
Learn it
How it works
- Simple interest: the same amount each year, based only on the original sum. Interest = principal × rate × years.
- Compound interest: each year's interest is added, so next year's is calculated on a bigger amount. Amount = principal × (1 + rate)^years.
- Multiplier: 4% growth is × 1.04; 3% is × 1.03.
- For borrowing, compare the APR (annual percentage rate), which includes fees. Higher APR means a more expensive loan.
- Paying only the minimum on a credit card means compound interest works against you.
Worked example 2
£1,000 at 5% compound interest for 3 years.
- Year 1: 1,000 × 1.05 = £1,050.
- Year 2: 1,050 × 1.05 = £1,102.50.
- Year 3: 1,102.50 × 1.05 = £1,157.63 (to the nearest penny).
Answer: £1,157.63
Try it online · print it · check it
Practice questions
Tips
Common mistakes
- Multiplying by 5 instead of 1.05 for compound growth.
- Adding the percentage to the multiplier twice.
Last reviewed: 25 September 2026