Simple Interest Calculator
Calculate simple interest on loans and investments with ease
Calculate Simple Interest
Determine interest earned or owed using the simple interest formula
What is Simple Interest?
Simple interest is a straightforward method of calculating interest where the interest amount remains constant over the investment or loan period. Unlike compound interest, it doesn't earn "interest on interest" - you only earn interest on the original principal.
Formula
I = P × r × t
A = P + I
I = Interest earned or owed
P = Principal (initial amount)
r = Annual interest rate (as a decimal)
t = Time period in years
A = Total amount (principal + interest)
When is Simple Interest Used?
- Car loans and some personal loans
- Short-term loans and payday loans
- Some bonds and certificates of deposit
- Interest calculations on late payments
- Quick estimates for investment returns
Simple vs. Compound Interest
The key difference between simple and compound interest becomes apparent over time:
$10,000 at 5% for 10 years:
Simple Interest: $15,000 (total)
Compound Interest: $16,289 (total)
Difference: $1,289 - compound interest earns more!
Example Calculation
Calculate simple interest on $10,000 borrowed at 5% annual rate for 5 years:
- Principal (P) = $10,000
- Rate (r) = 0.05 (5% as decimal)
- Time (t) = 5 years
- Interest (I) = $10,000 × 0.05 × 5 = $2,500
- Total Amount (A) = $10,000 + $2,500 = $12,500
Advantages of Simple Interest
- Easy to calculate and understand
- Predictable payment amounts
- Lower total interest cost compared to compound interest
- Beneficial for borrowers (lower cost) and simpler for lenders
- Transparent and straightforward
Practical Tips
- Use simple interest for quick estimates
- Prefer simple interest loans when borrowing (lower total cost)
- Prefer compound interest investments when saving (higher returns)
- Always verify which type of interest applies to your loan or investment
Real-World Example: Car Loans
Most car loans use simple interest, which benefits borrowers. If you borrow $25,000 at 5% for 5 years, you'll pay $6,250 in interest - exactly 5% × 5 years. Monthly payments are predictable, and you can calculate the total cost without complex formulas.
However, if you make extra payments, simple interest rewards you immediately. Each extra dollar reduces your principal, immediately lowering future interest. This is why paying off simple interest loans early saves significant money.
Why Banks Prefer Compound Interest
Banks rarely offer simple interest on savings accounts - they use compound interest because it pays less to savers but charges more on loans (when compound interest applies). As an investor, always seek compound interest products. As a borrower, prefer simple interest when possible.
Frequently Asked Questions
What is the difference between simple and compound interest?
Simple interest calculates interest only on the principal amount, while compound interest calculates interest on both the principal and accumulated interest. Simple interest remains constant each period, whereas compound interest grows exponentially over time.
When is simple interest used?
Simple interest is commonly used for car loans, short-term personal loans, some bonds and certificates of deposit, and late payment interest calculations. It's preferred when borrowing (lower total cost) but not ideal for savings compared to compound interest.
How do I calculate simple interest?
Use the formula: I = P × r × t, where I is interest, P is principal amount, r is annual interest rate (as decimal), and t is time in years. For example, $10,000 at 5% for 5 years equals $2,500 in interest.