Simple Interest Calculator
Calculate interest based on principal amount only
Simple Interest
Formula:
Where:
- A = Final amount
- P = Principal (initial investment)
- r = Annual interest rate (decimal)
- t = Time in years
Simple interest is calculated only on the original principal amount, not on previously accumulated interest.
It's often used for short-term loans, bonds, and some types of savings accounts. Unlike compound interest, the interest doesn't compound over time.
Result
Growth Projection
Simple vs. Compound Interest
| Feature | Simple Interest | Compound Interest |
|---|---|---|
| Calculation Basis | Interest calculated only on the principal amount | Interest calculated on principal and previously accumulated interest |
| Growth Pattern | Linear growth (straight line) | Exponential growth (curved line) |
| Formula | A = P(1 + rt) | A = P(1 + r/n)nt |
| Common Uses | Short-term loans, bonds, simple savings accounts | Investments, mortgages, retirement accounts, long-term savings |
| Long-term Growth | Lower total returns over long periods | Higher total returns over long periods |
How Simple Interest Works
Step 1: Determine the Principal
Start with your principal amount (P). This is the initial amount you're investing or borrowing.
Step 2: Calculate Annual Interest
Multiply the principal by the annual interest rate to find the interest earned each year: Annual Interest = Principal × Interest Rate
Step 3: Calculate Total Interest
Multiply the annual interest by the number of years to find the total interest: Total Interest = Annual Interest × Time (in years)
Step 4: Determine the Final Amount
Add the total interest to the principal to find the final amount: Final Amount = Principal + Total Interest
Example Calculation
Let's say you invest $10,000 at a simple interest rate of 5% for 5 years:
Principal (P): $10,000
Annual Rate (r): 5% or 0.05
Time (t): 5 years
Step 1: Calculate the annual interest: $10,000 × 0.05 = $500 per year
Step 2: Calculate the total interest over 5 years: $500 × 5 = $2,500
Step 3: Calculate the final amount: $10,000 + $2,500 = $12,500
Final Amount: $12,500
Interest Earned: $2,500
Practical Applications
Personal Loans
Many personal loans use simple interest, especially short-term loans. This calculator helps you understand the total cost of borrowing.
Bonds
Some bonds pay simple interest, where you receive regular interest payments based on the face value of the bond.
Basic Savings
Some savings accounts, particularly those with interest paid out rather than reinvested, effectively use simple interest calculations.
Car Loans
Many auto loans use simple interest, calculated based on the loan's unpaid principal balance.
Frequently Asked Questions
When is simple interest typically used?
Simple interest is commonly used for short-term loans and investments, typically lasting less than a year. It's also used for bonds where interest is paid periodically rather than being reinvested, and for some types of consumer loans like auto loans.
Why would I choose simple interest over compound interest?
As a borrower, simple interest is generally preferable because you'll pay less in total interest compared to compound interest. As an investor, compound interest is typically more advantageous for long-term growth. However, some investments with simple interest might offer higher stated interest rates or other benefits like liquidity or lower risk.
How does simple interest affect loan amortization?
With simple interest loans, the interest is calculated only on the remaining principal balance. As you make payments and reduce the principal, the interest portion of your payment decreases. This differs from compound interest loans where interest can be calculated on both principal and previously accrued interest.
Can simple interest be calculated for partial years?
Yes, for partial years, you would use the same formula but express the time in the appropriate fraction of a year. For example, for 6 months, you would use 0.5 years in the formula. For daily interest calculations, you might use 1/365 of the annual rate for each day.
Important Notes
- This calculator provides basic simple interest calculations and doesn't account for taxes or inflation.
- For most real-world investments, compound interest is more common than simple interest, especially for long-term investments.
- Simple interest provides lower returns than compound interest over the same period with the same interest rate.
- For loans, check whether they use simple interest or compound interest, as this significantly affects the total amount you'll pay.