Simple interest is the most basic form of interest calculation. Unlike compound interest, which earns interest on previous interest, simple interest is calculated only on the original principal. It's commonly used for short-term loans, car loans, some bonds, and certificates of deposit.
The simple interest formula
Where Principal is the initial amount, Rate is the annual interest rate (as a decimal), and Time is the number of years. The total amount after interest: Total = Principal + Interest.
Worked examples
- Savings deposit: $5,000 at 4% for 3 years. Interest = $5,000 × 0.04 × 3 = $600. Total = $5,600.
- Short-term loan: Borrow $2,000 at 8% for 6 months (0.5 years). Interest = $2,000 × 0.08 × 0.5 = $80.
- Car loan: $15,000 at 5.5% for 4 years. Interest = $15,000 × 0.055 × 4 = $3,300. Total repayment = $18,300.
Solving for any variable
The simple interest formula can be rearranged to solve for any of the four variables:
- Find interest: I = P × R × T
- Find principal: P = I ÷ (R × T)
- Find rate: R = I ÷ (P × T)
- Find time: T = I ÷ (P × R)
This calculator supports all four modes. For example, if you earned $600 interest on a 4% account over 3 years, the principal was: $600 ÷ (0.04 × 3) = $5,000.
Simple interest vs. compound interest
With simple interest, a $10,000 deposit at 5% earns exactly $500 every year — the interest never changes because it's always based on the original $10,000. With compound interest, the $500 earned in year 1 starts earning its own interest in year 2. Over short periods, the difference is small. Over decades, compounding dramatically outpaces simple interest — which is why understanding the distinction matters for long-term financial planning.