What's the difference between simple and compound interest?
Simple interest is calculated only on the original principal, so the dollar amount earned each period is constant: I = P × r × t. Compound interest is calculated on the principal plus all previously accrued interest, so the dollar amount grows each period and the total follows A = P(1 + r/n)^(nt). Over short periods the two are close; over decades, compound dramatically outpaces simple. The Compound Interest Calculator handles the second case.
When is simple interest actually used in real life?
U.S. Treasury bills, most auto loans, bridge loans, hard-money loans, payday and pawn-shop loans, and many short-term personal notes use simple interest. Some store-promotional financing ("12 months same as cash") and certain installment contracts also use it. Government Series EE and I savings bonds accrue on a schedule that approximates simple interest in their early years before semiannual additions kick in.
Are regular bank savings accounts simple or compound interest?
Almost always compound. Banks typically compound daily and credit interest monthly, so any balance you hold earns interest on interest. The Annual Percentage Yield (APY) shown on bank disclosures already reflects compounding; the underlying nominal rate does not. Use the Compound Interest Calculator for savings accounts, money-market accounts, and most CDs — not this one.
How is simple interest taxed?
In the U.S., interest earned on savings, bonds, T-bills, and most notes is taxable as ordinary income in the year it is paid or accrued, and is reported on Form 1099-INT (or 1099-OID for discount instruments like T-bills). U.S. Treasury interest is exempt from state and local tax but subject to federal tax. See IRS Publication 550 for the detailed rules. Tax treatment is the same whether the interest is simple or compound.
What's the simple-interest version of the Rule of 72?
The Rule of 72 (years to double ≈ 72 ÷ rate) is for compounding. For simple interest there is an exact rule: a principal doubles when total interest equals the principal, so rt = 1, meaning years to double = 100 / rate (percent). At 5% simple, doubling takes 20 years; at 8% it takes 12.5 years. Compound interest at 8% would double in only about 9 years — that gap is the cost of using simple interest for long-term savings.
How do I convert months or days to years for the Time field?
Months: divide by 12, so 6 months = 0.5, 9 months = 0.75, 18 months = 1.5. Days: divide by 365 for exact interest (most consumer use) or 360 for ordinary/banker's interest (some commercial loans, money-market quotes). Example: 73 days exact = 73/365 = 0.2 years. Always check which day-count convention your contract specifies before computing larger balances.
What's the difference between simple interest and add-on interest?
True simple interest is computed each day on the remaining principal, so paying down the loan reduces the interest base. Add-on interest computes total interest upfront on the original principal (P × r × t), adds it to the principal, then divides the sum into equal payments. The stated rate is the same, but the effective APR on an add-on loan is roughly double the simple-interest rate because you keep paying interest on principal you've already repaid. Truth-in-Lending disclosures must show the APR, so compare that figure.
Can the interest rate or interest be negative?
The calculator requires a non-negative rate and a positive principal and time. Real-world negative-yielding bonds and some European policy rates do produce a negative carrying return, but those are usually structured as discounted purchase prices rather than a literal negative rate in a simple-interest formula. After-inflation (real) returns can be negative if the rate is below the inflation rate, even when the nominal interest earned is positive.
How does paying early on a simple-interest loan save money?
On a true simple-interest loan (most U.S. auto loans), interest accrues daily on the outstanding principal. Paying a few days before the due date means fewer days of accrual on the old balance, so a larger share of the payment hits principal. Over a 5-year auto loan, consistently paying five days early can save several hundred dollars and shorten the payoff slightly — without changing the contract terms.
Why does my lender's interest figure differ slightly from this calculator?
The most common reasons are day-count conventions (365 vs 360 days), rate rounding inside the lender's system, treatment of leap years, fees rolled into the loan balance, and timing of payments mid-period. For a transparent simple-interest contract the difference is usually under 1%; if it's larger, ask the lender for an amortization or accrual schedule and confirm whether their figure is interest only or APR (which includes fees).
