Simple Interest Calculator
| Year | Simple Interest | Simple Total | Compound Interest | Compound Total | Difference |
|---|---|---|---|---|---|
| 1 | $50.00 | $1,050.00 | $50.00 | $1,050.00 | +$0.00 |
| 2 | $100.00 | $1,100.00 | $102.50 | $1,102.50 | +$2.50 |
| 3 | $150.00 | $1,150.00 | $157.63 | $1,157.63 | +$7.63 |
| 4 | $200.00 | $1,200.00 | $215.51 | $1,215.51 | +$15.51 |
| 5 | $250.00 | $1,250.00 | $276.28 | $1,276.28 | +$26.28 |
| 6 | $300.00 | $1,300.00 | $340.10 | $1,340.10 | +$40.10 |
| 7 | $350.00 | $1,350.00 | $407.10 | $1,407.10 | +$57.10 |
| 8 | $400.00 | $1,400.00 | $477.46 | $1,477.46 | +$77.46 |
| 9 | $450.00 | $1,450.00 | $551.33 | $1,551.33 | +$101.33 |
| 10 | $500.00 | $1,500.00 | $628.89 | $1,628.89 | +$128.89 |
Compound interest assumes annual compounding. Difference = compound total minus simple total.
The Simple Interest Formula
Simple interest is the most fundamental form of interest calculation. It is computed solely on the original principal — accumulated interest does not itself earn interest. This makes simple interest linear and predictable: interest grows in a straight line over time.
I = P × R × T
Where:
| Variable | Meaning | Example |
|---|---|---|
| I | Simple Interest (the interest earned or paid) | $150 |
| P | Principal (the original amount) | $1,000 |
| R | Annual Interest Rate (as a decimal) | 0.05 (5%) |
| T | Time in years | 3 |
Total Amount = P + I = P × (1 + R × T)
Step-by-Step Example
A bank offers a 5% per annum simple interest rate on a $1,000 deposit for 3 years. How much interest is earned and what is the total balance at maturity?
Simple Interest for Partial Periods
When the time period is not a whole year, convert it to a decimal fraction of a year before applying the formula.
| Period | Convert to T | Example (P=$2,000, R=6%) |
|---|---|---|
| 6 months | 6 ÷ 12 = 0.5 | I = $2,000 × 0.06 × 0.5 = $60 |
| 90 days (365) | 90 ÷ 365 = 0.2466 | I = $2,000 × 0.06 × 0.2466 = $29.59 |
| 90 days (360) | 90 ÷ 360 = 0.25 | I = $2,000 × 0.06 × 0.25 = $30.00 |
| 18 months | 18 ÷ 12 = 1.5 | I = $2,000 × 0.06 × 1.5 = $180 |
Banks and financial institutions typically use either a 360-day year (ordinary interest, also called "banker's interest") or a 365-day year (exact interest). US Treasury bills use actual days over 360.
Simple vs. Compound Interest: Long-Term Impact
The difference between simple and compound interest becomes dramatic over long time horizons. With simple interest, a $1,000 principal at 8% per year earns exactly $80 every year, forever. With compound interest (annual compounding), the same $1,000 at 8% earns $80 in year 1, then $86.40 in year 2 (because the $80 interest is now also earning 8%), and so on — the interest snowball grows each year.
| Year | Simple Interest Total | Compound Interest Total | Compound Advantage |
|---|---|---|---|
| 1 | $1,080 | $1,080 | $0 |
| 5 | $1,400 | $1,469 | +$69 |
| 10 | $1,800 | $2,159 | +$359 |
| 20 | $2,600 | $4,661 | +$2,061 |
| 30 | $3,400 | $10,063 | +$6,663 |
| 40 | $4,200 | $21,725 | +$17,525 |
At 8% annual rate on $1,000: after 40 years, compound interest produces 5.2× more wealth than simple interest. This is why compound interest is called the "eighth wonder of the world" — the effect is not just additive but multiplicative over time.
Where Simple Interest Is Used in Practice
Despite the advantage of compound interest for savings, simple interest remains common in several real-world contexts:
- Auto loans: Many car loans in the US use simple interest with daily accrual. Making payments early reduces the outstanding principal faster, thereby reducing total interest paid.
- Short-term loans: Personal loans with terms under 1–2 years often use simple interest because the compound effect is minimal at short durations.
- US Savings Bonds: Series I and EE bonds accrue interest based on a simple interest calculation applied semi-annually before compounding resets.
- Treasury Bills: T-Bills use a discount rate applied to face value, which is equivalent to simple interest over the short term to maturity.
- Vendor / trade credit: "Net 30, 2/10" terms offer a 2% discount for paying within 10 days — this is equivalent to an 18-day simple interest penalty that, annualized, equals ~36.7% APR.
Rearranging the Formula
The P × R × T formula can be rearranged to solve for any unknown variable:
P = I ÷ (R × T) — Find principal
R = I ÷ (P × T) — Find interest rate
T = I ÷ (P × R) — Find time period
Example: How long does it take for $500 to grow to $600 at 4% simple interest?
Frequently Asked Questions
What is simple interest?
Simple interest is interest calculated only on the original principal, never on accumulated interest. The formula is I = P × R × T, where P is the principal, R is the annual interest rate (as a decimal), and T is the time in years. Unlike compound interest, the interest earned in year 1 does not earn additional interest in year 2. Simple interest is predictable and linear — it grows in a straight line over time.
What is the simple interest formula?
Simple Interest (I) = Principal (P) × Annual Rate (R) × Time (T). Total Amount = P + I = P × (1 + R × T). For example: $1,000 at 5% for 3 years: I = $1,000 × 0.05 × 3 = $150. Total Amount = $1,000 + $150 = $1,150.
What is the difference between simple and compound interest?
Simple interest is calculated only on the original principal. Compound interest is calculated on the principal plus all previously accumulated interest. On a $1,000 principal at 5% per year: after 10 years, simple interest generates $500 in interest (total $1,500), while compound interest (annual compounding) generates $628.89 in interest (total $1,628.89). The difference grows exponentially over time — at 30 years, simple interest gives $2,500 total while compound gives $4,321.94.
Where is simple interest commonly used?
Simple interest is most common in short-term loans, car loans, some personal loans, US savings bonds, and certain installment loans. It is also used in treasury bills and some types of mortgages in specific countries. When a bank advertises an "add-on interest" loan, that is effectively simple interest calculated upfront and added to the loan amount. Short-term lending like payday loans and bridge loans also typically use simple interest.
How do I calculate simple interest for a partial year or in months/days?
Convert the time period to a fraction of a year. For months: T = months ÷ 12. For days, use either the actual/365 (exact interest) or actual/360 (ordinary interest, common in banking) convention. Example: $5,000 at 6% for 90 days using 360-day year: I = $5,000 × 0.06 × (90/360) = $5,000 × 0.06 × 0.25 = $75.
Related Calculators
- Compound Interest Calculator — See how compound interest grows money over time with multiple compounding frequencies
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- Savings Calculator — Project savings growth toward a goal with regular contributions
- ROI Calculator — Calculate return on investment and annualized ROI