What is the key difference between simple interest and compound interest, and how does this difference affect the effectiveness of each?

Simple interest remains the same rate annually. for example, the rate for borrowing $1,000 is 10%/per year. if it were simple interest, then 10% would be paid for the second year, the third year, and so on. for compound interest, interest grows every year. it works like this: say, you borrowed $1,000. the interest rate is 10%. after a year, you owe $1,100. that's because you still haven't paid this year's interest. so, naturally, the amount you owe in interest grows. 10% of $1,100 is more than that of $1,000. this is most commonly used method  with banks and loaners. that way, interest multiplies and they can earn more to make up for the time that you have taken the money away from them, thus limiting their resources. if by effectiveness you mean which one is more of an equal win-win, then compound interest would be best.  hope this ! have a good day : )