Simple Interest Calculator
Calculate simple interest on loans and investments. Find interest earned, total amount, principal, rate, or time.
Simple Interest Formulas
Simple Interest
Total Amount
Principal
Rate
Calculate
Understanding Simple Interest
Simple interest is the most basic way to calculate interest on a loan or investment. Unlike compound interest, simple interest is calculated only on the original principal amount. This makes it straightforward to calculate and understand.
Simple interest is commonly used for short-term loans, car loans, some bonds, and certain savings instruments. Understanding how it works helps you make better financial decisions and compare different financial products.
Easy to Calculate
Simple formula: Interest = Principal × Rate × Time
Predictable
Same interest amount each period, easy to plan for.
Common Uses
Car loans, short-term loans, some bonds.
Fair Comparison
Compare different loan offers easily.
Simple Interest Formula Explained
The simple interest formula has three components that determine how much interest you'll earn or owe.
Principal (P)
The original amount of money borrowed or invested. This is the base amount on which interest is calculated. For a $10,000 loan, the principal is $10,000.
Rate (r)
The annual interest rate expressed as a decimal. A 5% rate becomes 0.05 in the formula. This determines how much interest accrues per year as a percentage of principal.
Time (t)
The time period in years. For months, divide by 12 (6 months = 0.5 years). For days, divide by 365 (90 days = 90/365 years).
Putting It Together
A $5,000 loan at 8% for 3 years: I = $5,000 × 0.08 × 3 = $1,200 total interest. Your total repayment would be $6,200.
Simple Interest Examples
Let's work through some common scenarios to see simple interest in action.
Common Calculations
$25,000 car loan at 6% for 5 years. Interest = $25,000 × 0.06 × 5 = $7,500. Total repayment = $32,500. Monthly payment ≈ $541.67.
$1,000 in savings at 4% for 6 months. Interest = $1,000 × 0.04 × 0.5 = $20. You'll have $1,020 after 6 months.
$10,000 CD at 5% for 2 years. Interest = $10,000 × 0.05 × 2 = $1,000. Maturity value = $11,000.
$3,000 personal loan at 10% for 18 months. Interest = $3,000 × 0.10 × 1.5 = $450. Total repayment = $3,450.
Simple vs. Compound Interest
Understanding the difference between simple and compound interest is crucial for making informed financial decisions.
| Factor | Simple Interest | Compound Interest | Which is Better? |
|---|---|---|---|
| Calculation basis | Principal only | Principal + accumulated interest | Depends on context |
| Growth pattern | Linear (same each period) | Exponential (accelerates) | Compound grows faster |
| For borrowers | Pay less over time | Pay more over time | Simple is better |
| For savers | Earn less over time | Earn more over time | Compound is better |
| $10K at 5% for 10 years | $15,000 total | $16,289 total | $1,289 difference |
When Simple Interest Is Used
Simple interest isn't as common as compound interest, but it's still used in several important financial contexts.
Auto Loans
Many car loans use simple interest. Your monthly payment goes toward both principal and interest, and the interest portion is calculated on the remaining principal each month.
Certain Bonds
Some bonds, particularly government savings bonds, pay simple interest. The interest payments are fixed and based only on the face value of the bond.
Short-Term Loans
Payday loans, pawn shop loans, and some personal loans may use simple interest because the loan term is too short for compounding to matter significantly.
Consumer Financing
Some store financing offers use simple interest, especially for promotional periods. This makes it easier to calculate the true cost of the purchase.
Mortgages (Daily Calculation)
Some mortgages calculate interest daily using simple interest principles. Interest accrues based on the current principal balance, not compounding.
Calculating Time Periods
Converting different time periods to years is essential for accurate simple interest calculations.
Months to Years
Divide months by 12. Examples: 6 months = 0.5 years, 18 months = 1.5 years, 30 months = 2.5 years.
Days to Years
Divide days by 365 (or 360 for some financial calculations). Examples: 90 days = 0.247 years, 180 days = 0.493 years.
Ordinary vs. Exact Interest
Banks sometimes use a 360-day year (ordinary interest) instead of 365 days (exact interest). This results in slightly more interest for the lender.
Check Your Terms
Always verify which convention your lender uses. The difference between 360 and 365 days can add up over longer loan terms.
Frequently Asked Questions
How do I calculate simple interest for months instead of years?
Convert months to years by dividing by 12. For example, for 18 months, use t = 18/12 = 1.5 years in the formula. So $2,000 at 6% for 18 months: I = $2,000 × 0.06 × 1.5 = $180.
What's the difference between APR and simple interest rate?
APR (Annual Percentage Rate) includes fees and costs in addition to the interest rate, giving a more complete picture of borrowing costs. Simple interest rate is just the percentage charged on the principal. APR is typically higher than the stated simple interest rate.
Can simple interest be negative?
The interest rate cannot be negative in simple interest calculations (though some financial instruments can have negative yields). However, your investment's total return could be negative if you factor in fees or inflation that exceed the interest earned.
How do I find the principal if I know the interest earned?
Rearrange the formula: P = I / (r × t). For example, if you earned $300 interest at 5% over 2 years: P = $300 / (0.05 × 2) = $300 / 0.10 = $3,000 principal.
Is simple interest better for borrowers or lenders?
Simple interest is generally better for borrowers because you pay interest only on the original principal, not on accumulated interest. Lenders often prefer compound interest because they earn more over time.
How is simple interest different from add-on interest?
Add-on interest calculates all interest upfront and adds it to the principal for determining payments. This makes the effective rate higher than stated. Simple interest calculates interest on the declining balance as you pay down the loan.
Pro Tips
- Bookmark this calculator for quick access in the future
- Use the share button to send your results to others
- Try different scenarios to compare outcomes
- Check out our related calculators for more insights
Found this calculator helpful? Share it with others: