What is the difference between simple and compound interest?

Both simple and compound interests rates can be written as a percentage of the principal amount following a fixed term, for example if you borrow £100 at an interest rate of 5% per anum. This means that the amount of interest added to the debt would be £5 after the first year. Where simple and compound interests differ is that simple interest remains the same year on year relative to the original principal amount borrowed. For example, in the second year of interest for the above example, £5 would be added again to the £105 now owed. Compound interest takes into account the added interest from the first year however, with the interest added being 5% of £105, therefore adding £5.25 rather than just £5