What’s the difference between accrued vs. compound interest?

By Sasha Bulatskaya | Published on October 21, 2025

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You may have come across terms like compound interest and accrued interest and wondered how they impact your finances. One applies mainly to debt while the other can apply to saving, investing, and debt management. Learning the difference between these types of interest can help you understand your student loans, savings accounts, and investing tools.

In this post, we’ll break down the basics so you can make more informed decisions when it comes to managing your money.

What is an interest rate?

There are several types of interest rates and all of them can apply to borrowing, saving, or investing money.

What are the different types of interest?

If you’re taking out a student loan ¹ or making a new purchase on a credit card, then interest can be defined as the cost of borrowing money from a lender. This is known as simple interest and it doesn’t include compounding or accrued interest (more on that later). Simple interest is usually a percentage of the original amount you borrowed, known as the principal balance.

Then there’s accrued interest, which is how much interest is collected on your loan over time. It plays a huge role in your growing debt, so understanding how it works as a borrower is crucial.

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What is accrued interest? A guide for student loan borrowers | Earnest Earnest LLC

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Compound interest includes the principal amount and accrued interest combined. You are more likely to see compound interest in investing/savings tools, but it could also apply to loans.

How compound interest works: Your money makes money

Think of compound interest as a snowball effect. The longer your money is left in an account, the larger it grows, thanks to the interest being reinvested and earning even more money for you. With compound interest, your initial investment or principal amount grows with interest earned and accumulated from previous compounding periods.

The compound interest amount is determined by a compound interest formula. There are many calculators that can help you see how it works, including this one from the Federal Securities and Exchange Commission.

When compound interest can help you financially

Many personal finance advisors tout the power of compound interest when it comes to investing. Let’s take a look at the pros of compound interest:

• Your money can grow faster over time because compound interest includes your original deposit and the interest that’s accumulated each month.
• You earn interest not only on your initial investment but also on the interest earned, expanding over time.
• The longer you leave your money untouched, the more it grows. That’s why many financial news sites advise you to invest in index funds and leave your money for a long time.

When compound interest can hurt you financially

Although compound interest can be a very good thing for your savings account, it has some downsides when it comes to loans

• If you have interest compounding on a savings account and you withdraw your money early, you may face penalties or forfeit some of the interest earned
• If you have a loan or mortgage with compounding interest, your debt can quickly grow out of control

What does accrued interest mean?

Accrued interest is the amount of money that is collected on your loan over a period of time. Some loans accrue interest daily, while others accrue interest monthly. Interest accrual can also make your loans more expensive. Once the accumulated interest is added to your account, you’re paying interest on the new, higher amount the following month.

When accrued interest can help you financially

Accrued interest can be a valuable tool to guide your financial planning. Here’s why:

• If you have a loan that is accruing interest, you can see how much money you owe and how it increases your account balance over time
• You can plan your repayment strategy based on the accrued interest and when it is capitalized (get added to your loan).
• If you have a savings or investment account that is accruing interest, you can calculate how much is added to your account over time.

When accrued interest can hurt you financially

One of the largest drawbacks of accrued interest is its relationship to debt. Here’s why:

• If you wait too long to pay or your payment doesn’t cover interest, the loan amount may become much larger than the initial sum
• Accrued interest can add to your debt, especially in the case of student loans

Why accrued interest is critical to your student loans

When you’re borrowing money, you’re going to focus more on accrued interest. That’s because while you’re in school or during periods of deferment, interest might accrue on your student loans, adding to your loan balance. Your loan will keep growing and look much larger when you finally start making monthly payments.

How do you stop interest from accruing?

The most reliable way to keep your accrued interest from getting out of control is to make interest payments while in school. This way, when you graduate, you’ll have the original principal amount to pay off and not a penny more.

How does interest accrue on your Earnest student loans?

At Earnest, our interest is usually equivalent to the APR, or the annual percentage rate because we don’t charge origination fees for taking out the loan. Your loan will collect interest daily, in a process known as simple daily interest.

To help you get ahead of accrued interest, we have four different repayment options you can choose from. If you choose to make full monthly payments while in school, you can pay off your loan and any accrued interest as you go. With the interest-only payment option, you can make interest payments immediately after taking out the loan. If you go this route you won’t make a dent in your principal balance, but you also won’t need to worry about interest collecting on your loans while in school.

If you can’t afford either of these options, you can make $25 in-school payments ². Although it might not seem like a lot, even a small payment like that could help you save thousands of dollars over the life of the loan. To find out which repayment option is better for you, you can check out the Earnest student loan repayment calculator.

Interest and investing: Compound interest helps your money grow

If you’re investing, you’re likely to focus more on compound interest. Let’s say you put some money into an investment account. Over time, that initial investment earns interest, which gets added back into the account, so you earn even more interest on the larger sum. The longer you leave it untouched, the more it grows.

Before you invest, it’s important to note that if you lose money investing, there’s no way to get it back. While government organizations like the Federal Deposit Insurance Corporation (FDIC) insure bank accounts, investment accounts don’t enjoy the same federal protections.

Interest and saving: Look for accounts with high interest rates

When it comes to saving money, a high-yield savings account will use compound interest to help increase your savings. The more you save, the more interest you earn, and the growth cycle continues.

One benefit of a savings account is that you still get to reap the benefits of compounding, but the FDIC protects your money. A savings account may not get the same rate of return as an investing account, but up to $250,000 of your money is insured by the government.

Knowing the difference could help you manage your money better

Compound and accrued interest have their own roles to play in the financial world, affecting everything from the growth of your investments to the management of your student loans. By understanding these concepts, you can make informed decisions about how to make your money work for you, whether it’s through investing, saving, or tackling your student loan debt.

PS. If you applied for financial aid, grants, and scholarships but they’re not enough a private student loan could help. Visit our loan page to learn more about Earnest student loans and check your interest rate for free.

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