What is simple interest?
Simple interest is the most basic way money earns (or costs) interest: you earn the same amount every year, calculated only on the original principal. The interest itself never earns interest. That makes simple interest easy to predict, easy to check, and the standard basis for many short-term loans, bonds, late-payment penalties and introductory finance problems.
The simple interest formula
Where I is the interest, P is the principal you start with, R is the annual rate as a decimal (5% = 0.05), and T is the time in years. The final amount is simply A = P + I. For part-years, convert months to a fraction of a year — 6 months is T = 0.5.
Simple vs compound interest
The difference is what happens to the interest. With simple interest it sits aside; with compound interest it is added to the principal and earns interest itself. Over one or two years the gap is small. Over decades it is enormous — which is why savings and investments are almost always quoted in compound terms, while simple interest survives mainly in short-term and penalty calculations.
Where simple interest is used
- Short-term loans and car loans in some markets, where interest is charged on the original amount borrowed.
- Bonds and treasury bills, where coupon payments are a fixed percentage of face value.
- Late fees and penalties, often charged as simple interest per month or per day.
- School and exam problems — simple interest is the foundation before compounding is introduced.
Worked example
You deposit $10,000 at 5% per year for 3 years. Interest = $10,000 × 0.05 × 3 = $1,500, so the final amount is $11,500. Notice the interest is exactly $500 in each of the three years — the year-by-year table below shows that flat pattern, which is the signature of simple interest.
How to use this calculator
- Enter the principal — the amount you are lending, depositing or borrowing.
- Enter the annual interest rate as a percentage.
- Enter the time in years (use 0.5 for six months, 0.25 for three months).
- Read the interest earned and the final amount in the results panel.
- Compare with the compound interest calculator to see what compounding would add.
A quick sanity check
Simple interest should always equal principal × rate × years with no surprises. If a lender's quote implies more than that for the same period, the extra is coming from fees or compounding — ask which, and use the APR Calculator to see the true annual cost of a loan offer.