What Is Simple Interest?
Simple interest is the cost of borrowing money or the return on an investment calculated only on the original principal amount. Unlike compound interest, which earns interest on previously accumulated interest, simple interest stays the same every period. This makes a simple interest calculator especially useful for understanding short-term loans, auto loans, and basic savings products where interest does not reinvest.
How to Calculate Simple Interest
The simple interest formula is straightforward: Interest equals the principal multiplied by the annual interest rate and the time in years. Written as I = P × r × t, where P is the principal in dollars, r is the annual rate as a decimal, and t is the time expressed in years. If your time is given in months, divide by 12; if given in days, divide by 365. The total amount you owe or earn is simply the principal plus that interest.
For example, borrowing $10,000 at a 5% annual rate for 3 years produces $1,500 in interest, for a total of $11,500. Because simple interest never compounds, a longer term produces a straight-line increase rather than the accelerating growth you see with a compound interest calculator.
Simple Interest vs. Compound Interest
The key difference is reinvestment. With simple interest, your interest is calculated on the original principal only. With compound interest, each period's interest is added back to the balance, so future interest is earned on a growing amount. Over long horizons, compounding makes a dramatic difference, which is why savings accounts, CDs, and retirement funds typically use compound interest.
When Is Simple Interest Used?
- Short-term personal and auto loans
- Certificates of deposit and some fixed deposits
- Federal student loans that are not currently accruing interest
- Quick cost comparisons before choosing a lender
For more detailed loan estimates including amortization, try our loan calculator or explore how your savings can grow over time with the savings calculator.