Simple Interest Calculator
The Formula
I = Interest earned
P = Principal (initial amount)
r = Annual interest rate (decimal)
t = Time (in years)
Related Calculators
Understanding Simple Interest
What is Simple Interest?
Simple interest is a method of calculating interest where the interest is computed only on the original principal amount. Unlike compound interest, simple interest doesn't earn interest on previously earned interest.
Simple vs Compound Interest
Simple Interest
- • Interest on principal only
- • Linear growth
- • Easier to calculate
- • Less return over time
- • Used for short-term loans
Compound Interest
- • Interest on principal + interest
- • Exponential growth
- • More complex calculation
- • Higher returns over time
- • Used for investments, mortgages
Example Calculation
Problem:
You invest $5,000 at 6% annual simple interest for 3 years. How much interest will you earn?
Solution:
I = P × r × t
I = $5,000 × 0.06 × 3
I = $900
Total amount after 3 years: $5,000 + $900 = $5,900
Where Simple Interest is Used
Car Loans
Many auto loans use simple interest. Your monthly payment reduces the principal, and interest is calculated on the remaining balance.
Short-term Personal Loans
Personal loans with fixed terms often use simple interest, making it easy to know exactly how much you'll pay.
Certificates of Deposit (CDs)
Some short-term CDs use simple interest, though most now use compound interest.
Treasury Bills
T-bills and other short-term government securities often calculate returns using simple interest.
Formula Variations
Find Interest: I = P × r × t
Find Principal: P = I / (r × t)
Find Rate: r = I / (P × t)
Find Time: t = I / (P × r)
Total Amount: A = P + I = P(1 + rt)
Pro Tip
When comparing loan offers, simple interest loans can be better for shorter terms since you're not paying interest on interest. However, for long-term savings, compound interest will grow your money much faster.
Frequently Asked Questions
What is the simple interest formula?
Simple interest is calculated as I = P x r x t, where I is interest, P is principal (initial amount), r is the annual interest rate (as a decimal), and t is time in years. For example: $5,000 at 6% for 3 years = $5,000 x 0.06 x 3 = $900 in interest.
What is the difference between simple and compound interest?
Simple interest is calculated only on the original principal, resulting in linear growth. Compound interest is calculated on principal plus accumulated interest, resulting in exponential growth. Over long periods, compound interest earns significantly more. A $10,000 investment at 5% for 10 years earns $5,000 simple interest vs $6,289 compound.
When is simple interest used?
Simple interest is common in: auto loans, short-term personal loans, some bonds and T-bills, and certain savings instruments. It's easier to calculate and understand. Many mortgages and credit cards use compound interest instead, which costs borrowers more over time.
How do I solve for rate, time, or principal in simple interest?
Rearrange the formula: Rate = I/(P x t), Time = I/(P x r), Principal = I/(r x t). For example, if you earned $600 interest on $5,000 over 2 years, the rate = $600/($5,000 x 2) = 0.06 or 6%.