This simple interest calculator computes the interest earned or paid on a loan or deposit where interest is calculated solely on the original principal amount. There is no compounding in this calculation.
Formula Used
I = P × r × t
I
— Interest amount earned or paid
P
— Principal (original amount borrowed or invested)
r
— annual interest rate (expressed as a decimal, e.g. 4% = 0.04)
t
— time period the money is borrowed or invested, in years
Example Calculation
If you invest $5,000 at an annual simple interest rate of 4% for 3 years: Interest I = 5,000 × 0.04 × 3 = $600. The total value at the end of 3 years is $5,000 + $600 = $5,600.
Frequently Asked Questions
Simple interest is interest calculated strictly on the original principal amount of a loan or investment. Unlike compound interest, you do not earn interest on previously accumulated interest.
Simple interest is commonly used for short-term loans, auto loans, personal loans, and simple savings certificates where compounding is not specified.
Simple interest grows linearly (the interest amount stays the same every year), while compound interest grows exponentially because interest is added back to the principal, earning more interest.
Divide the number of months by 12 to convert the term to years. For example, a 6-month term is 0.5 years (6 ÷ 12) in the formula.
Simple interest is generally better for a borrower because the total interest paid is lower than it would be with compound interest. Lenders typically prefer compound interest to maximise returns.