What Is Simple Interest?
Interest is the cost you pay to borrow money or the compensation you receive for lending money. Simple interest is interest that is only calculated on the initial sum (the "principal") borrowed or deposited. Generally, simple interest is set as a fixed percentage for the duration of a loan. No matter how often simple interest is calculated, it only applies to this original principal amount. In other words, future interest payments won't be affected by previously accrued interest.
Simple Interest Formula
The basic simple interest formula is:
Simple Interest = Principal x Interest Rate x Time
I = P x r x t
In this formula:
- I = Total simple interest
- P = Principal amount or the original balance
- r = Annual interest rate (as a decimal)
- t = Loan term in years
You can manipulate "t" to calculate interest according to the actual period. For instance, if you wanted to calculate interest over six months, your "t" value would equal 0.5.
Simple Interest Example
Let's say you take out a $10,000 loan at 5% annual simple interest to repay over five years. You want to know your total interest payment for the entire loan.
Total Interest = $10,000 x 0.05 x 5 = $2,500
End Balance = $10,000 + $2,500 = $12,500
Now that you know your total interest, you can use this value to determine your total loan repayment required ($12,500). You can also divide the value to determine how much interest you'd pay daily or monthly.
How to Use This Simple Interest Calculator
- 1
Choose a Calculation Mode
Select one of four tabs: Balance, Principal, Term, or Rate. Each mode solves for a different unknown variable while using the others as inputs.
- 2
Enter Your Values
Fill in the principal amount, interest rate, and term. Choose whether the rate is per year or per month, and whether the term is in years or months.
- 3
Click Calculate
Press the Calculate button to see your results. The calculator displays the end balance, total interest, step-by-step calculation breakdown, and visual charts.
- 4
Review the Schedule
Scroll down to see a yearly schedule showing the interest earned and running balance for each year of the term.
Simple Interest vs. Compound Interest
Compound interest accrues interest on both the initial principal and any accumulated interest. Unlike simple interest, where you only pay interest on the original balance, compound interest means you pay interest on interest too.
For a quick comparison, consider a $10,000 loan at 5% interest repaid over five years. With simple interest, you'd repay $12,500 total. With compound interest (compounded monthly), you'd repay $12,833.59. Over time, the difference between simple and compound interest grows exponentially.
Simple Interest
Interest is calculated only on the original principal. Growth is linear. Better for borrowers as you pay less total interest.
Compound Interest
Interest is calculated on principal plus accumulated interest. Growth is exponential. Better for investors as your money grows faster.
What Financial Instruments Use Simple Interest?
Simple interest works in your favor as a borrower, since you're only paying interest on the original balance. You may see simple interest on short-term loans, auto loans, and some personal loans. Some bonds also pay an interest coupon based on simple interest. However, most checking and savings accounts, as well as credit cards, operate using compound interest.