Simple Interest Calculator

Understanding Simple Interest

Simple interest is a straightforward way to calculate the cost of borrowing money or the return earned on investments. When you take out a loan or deposit funds into certain accounts, interest is either charged or earned over time. For example, you might pay interest on a car loan or earn it from a savings account or a certificate of deposit (CD).

With simple interest, the calculation is based solely on the original amount of money — called the principal. The interest rate remains constant throughout the loan or investment term, and no interest is added on previously earned or accrued interest. In short, the interest doesn’t compound.

How to Calculate Simple Interest

The standard formula for calculating simple interest is:

Simple Interest = Principal × Interest Rate × Time

This formula allows you to find any one value if the other two are known — and our calculator can do that for you instantly.

Formula Notation Using Years

Another common version of the formula is:

                I =P × r × t

Where:

• I = Total simple interest

• P = Principal amount

• r = Annual interest rate (as a decimal)

• t = Time in years

To adjust for shorter periods, you can convert time to fractions. For instance, half a year would be entered as t = 0.5.

Simple Interest for Different Time Periods

You might also encounter this version of the formula:

                I = P × r × n

Where:

• I = Total interest

• P = Principal

• r = Interest rate per period (e.g., per month or day)

• n = Number of periods

This version is useful if you’re working with monthly, weekly, or daily interest rates. For example, if you want to calculate interest using a monthly rate, you’d plug in the monthly rate for r and the total number of months for n.

Simple Interest Calculation Examples

Example 1: Using I = Prt
Suppose you borrow $10,000 at a 5% annual interest rate for five years.

• First, multiply the principal by the rate:
  $10,000 × 0.05 = $500

• Then, multiply by time:
  $500 × 5 = $2,500

So, you’ll pay $2,500 in interest, and your total repayment would be $12,500.

Example 2: Using I = Prn
Now let’s say you have a monthly interest rate of 5%, and you want to calculate the interest for one year.

• $10,000 × 0.05 × 12 = $6,000

• Total repayment: $10,000 + $6,000 = $16,000

When Is Simple Interest Used?

Simple interest typically benefits borrowers because it only applies to the initial loan balance. Unlike compound interest, it doesn’t increase over time based on accumulated interest. You’ll often find simple interest on short-term loans or personal lending arrangements.

However, for investors, simple interest may not offer the same growth potential. That’s because it lacks the compounding effect that increases returns over time. Still, some investments — like bonds that pay fixed interest or dividend-paying stocks — may use simple interest unless you reinvest those earnings to compound.

Most savings accounts, credit cards, and long-term investments use compound interest, which can either work for or against you, depending on whether you’re earning or paying interest.

Simple vs. Compound Interest

Compound interest differs by applying interest to both the original principal and any accumulated interest. Over time, this leads to exponential growth — or higher costs — depending on the context.

Let’s compare:

• Simple interest loan: $10,000 at 5% for 5 years → $2,500 in interest → $12,500 total

• Compound interest loan (compounded monthly): $10,000 at 5% for 5 years → $2,833.59 in interest → $12,833.59 total

As you can see, compound interest leads to a higher repayment amount over time.

Compound Interest Formula:

• A = P × (1 + r/n) ^ (n × t)

Where:

• A = total balance after interest

• P = principal

• r = annual interest rate

• n = number of times interest compounds per year

• t = time in years

More frequent compounding means more interest earned or paid. For example:

• Daily compounding → n = 365

• Monthly compounding → n = 12

Which Interest Type Is Better?

If you’re borrowing money, simple interest is typically cheaper because it doesn’t increase over time. If you’re saving or investing, compound interest can yield significantly higher returns in the long run.

To explore the benefits of compound growth, try our Compound Interest Calculator and see how compounding can boost your financial future.