Simple Interest Calculator
Simple interest is a straightforward method of calculating interest where it is applied only to the original principal amount. Unlike compound interest, the interest earned does not accumulate or earn additional interest, making it easier to calculate and predict.
Simple interest is commonly used in short-term loans, auto loans, and some types of bonds. It provides a transparent way to understand the cost of borrowing or the return on an investment. Knowing how to calculate simple interest helps you compare financial products and make better borrowing decisions.
How it works
I = P × r × t, where I is the interest earned, P is the principal amount, r is the annual interest rate (as a decimal), and t is the time in years. The total amount is A = P + I.
Use cases
- Calculating interest on short-term personal loans
- Understanding returns on certificates of deposit (CDs)
- Estimating auto loan interest payments
- Comparing simple vs. compound interest on different products
Frequently asked questions
What is the formula for simple interest?
Simple interest is calculated as 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. The total amount owed or earned is A = P + I. Only the original principal earns interest, never the accumulated interest.
What is the difference between simple and compound interest?
Simple interest applies only to the original principal, so the interest amount is the same every period. Compound interest applies to the principal plus previously accumulated interest, so it grows faster over time. For the same rate and term, compound interest always produces a higher total.
How do I calculate simple interest on a loan?
Multiply the principal by the annual rate (as a decimal) and by the number of years. For example, a 1,000 loan at 5% for 3 years earns 1,000 × 0.05 × 3 = 150 in interest, for a total of 1,150. This calculator performs the math automatically once you enter the three values.
How do I convert an interest rate to a decimal?
Divide the percentage by 100. A 5% rate becomes 0.05, and a 12% rate becomes 0.12. This decimal form is what the simple interest formula I = P × r × t requires for the rate.
How do I calculate simple interest for months instead of years?
Since the formula uses time in years, convert months to years by dividing by 12. For example, 6 months is 0.5 years and 18 months is 1.5 years. So a 2,000 principal at 8% for 6 months earns 2,000 × 0.08 × 0.5 = 80 in interest.