Simple Interest
Interest calculated only on principal.
What does Simple Interest mean?
Simple interest is a method of calculating interest where the charge is applied only to the original principal amount. Unlike compound interest, earned interest is not added back to the principal, so the interest amount stays the same each period. It's commonly used for short-term loans, car loans, and some bonds.
How to calculate Simple Interest
The simple interest formula is I = P × r × t, where I is the total interest, P is the principal (initial amount), r is the annual interest rate (as a decimal), and t is the time in years. The future value is A = P + I = P(1 + rt). For example, $10,000 at 5% for 3 years gives I = 10000 × 0.05 × 3 = $1,500, so the future value is $11,500.
FAQ
Simple interest is calculated only on the original principal, so it grows linearly. Compound interest is calculated on the principal plus accumulated interest, leading to exponential growth. Over long periods, compound interest yields significantly more.
Simple interest is commonly used for short-term loans, auto loans, some personal loans, Treasury bills, and certificates of deposit (CDs) with terms under a year. It is also used for calculating interest on bonds (coupon payments).
Simple interest is generally better for borrowers because the total interest paid is lower than with compound interest over the same period. Conversely, lenders or investors earn less with simple interest compared to compound interest.
Yes. To calculate monthly simple interest, divide the annual rate by 12 and express the time in months. For example, 6% annually is 0.5% monthly. For a $5,000 loan over 6 months: I = 5000 × 0.005 × 6 = $150.
Simple interest grows linearly with time — doubling the time doubles the interest. This is different from compound interest, where longer periods produce disproportionately higher returns due to the compounding effect.
Related calculators
- Compound Interest— Growth of money with reinvested interest.
- Loan Payment— Monthly payment for borrowed amount.
- ROI— Return relative to investment cost.
- Time Value of Money— Present vs future value.