The direct answer
Simple deposit interest applies the rate only to the original deposit; annual compound interest also earns interest on earlier modeled interest. The applicable agreement and local requirements determine whether interest is owed and what rate and convention apply.
Separate the mathematical convention from the rule
The calculator asks for a deposit, rate, years and simple or annual-compound method. It does not select a legally required rate or classify the tenancy. Rules can be program-specific or jurisdiction-specific; a federal housing-program example is not a national rate rule for every rental. Verify the applicable requirement before choosing an assumption.
To apply the approach to an editable scenario, use the Security Deposit Interest Calculator. For the neighboring question, explore Prorated Rent Calculator.
Apply the selected timing consistently
Simple interest is deposit times annual rate times years. Annual compound ending balance is deposit times one plus the annual rate raised to years. The tool uses annual compounding, not a monthly bank account schedule. A fractional-year scenario is a mathematical convention in this model and may differ from an actual contractual day-count calculation.
Distinguish interest from deductions or repayment
Interest calculated here is not a determination of the amount due after damage deductions, unpaid rent or other legally permitted adjustments. It is a stand-alone arithmetic result. Rounding is applied to displayed dollars after calculation. Negative-rate scenarios need careful review; the model rejects combinations producing a negative simple-interest balance.
Worked example
A $3,000 deposit at 2.5% for two years earns $150 with simple interest. Annual compounding produces $151.875 interest, displayed as $151.88, and an ending balance of $3,151.88. The extra $1.88 is the rounded effect of interest on the first year’s interest.
Open Security Deposit Interest Calculator and test your assumptions →
Common mistakes and limitations
Do not present the default 2.5% as a required U.S. deposit rate. Do not use this result to decide whether a deduction from the deposit is permitted.
Security-deposit rules and required rates differ by jurisdiction. The calculator must not auto-apply a legal rate without a sourced location-specific module.
Frequently asked questions
Does the calculator find a statutory rate?
No. The user supplies the rate and must verify the applicable tenancy and location requirements.
Why does compound interest differ from simple interest?
The annual-compound scenario applies later growth to a balance that includes earlier modeled interest.
Sources and further reading
The article’s examples are illustrative arithmetic. The references below provide context for operating, valuation or transaction concepts; they do not endorse the assumptions or the calculator.
- GovInfo / HUD — 24 CFR §880.608 — Security deposits (federal housing program example)Program-specific example referencing state/local deposit requirements; not a national interest-rate rule.
Read our editorial policy for the scope of these educational methods.