Calculate simple interest for loans and investments with easy-to-understand formulas. Find interest earned, principal required, interest rates, or time periods with detailed breakdowns.
Simple interest is the most basic form of interest calculation, where interest is calculated only on the original principal amount. Unlike compound interest, simple interest does not earn interest on previously earned interest, making it easier to calculate and understand.
Simple interest is commonly used in short-term loans, some bonds, auto loans, and basic savings calculations. Understanding how to calculate simple interest helps you compare loan terms and understand the true cost of borrowing or return on investments.
I = Interest, P = Principal, r = Annual interest rate (decimal), t = Time in years
A = Total amount (principal + interest)
Calculate principal needed to earn specific interest
Calculate interest rate given principal, interest, and time
Calculate time needed to earn specific interest
| Principal | Rate | Time | Simple Interest | Total Amount |
|---|---|---|---|---|
| $1,000 | 5% | 1 year | $50 | $1,050 |
| $1,000 | 5% | 2 years | $100 | $1,100 |
| $1,000 | 10% | 1 year | $100 | $1,100 |
| $5,000 | 6% | 3 years | $900 | $5,900 |
| $10,000 | 4% | 6 months | $200 | $10,200 |
| Principal: $10,000 at 6% | 1 Year | 3 Years | 5 Years | 10 Years |
|---|---|---|---|---|
| Simple Interest | $10,600 | $11,800 | $13,000 | $16,000 |
| Compound Interest (Annual) | $10,600 | $11,910 | $13,382 | $17,908 |
| Difference | $0 | $110 | $382 | $1,908 |
| Advantage to Compound | 0% | 0.9% | 2.9% | 11.9% |
| Time Period | Conversion to Years | Example | Calculation |
|---|---|---|---|
| Days | Days ÷ 365 | 90 days | 90/365 = 0.247 years |
| Weeks | Weeks ÷ 52 | 26 weeks | 26/52 = 0.5 years |
| Months | Months ÷ 12 | 18 months | 18/12 = 1.5 years |
| Quarters | Quarters ÷ 4 | 6 quarters | 6/4 = 1.5 years |
Daily Simple Interest: Most auto loans calculate interest daily using: Daily Interest = Balance × (Annual Rate ÷ 365).
Payment Application: Payments first cover accrued interest, remainder reduces principal.
Early Payoff Savings: Paying off early saves future interest since no compounding occurs.
Extra Payments: Additional principal payments directly reduce future interest charges.
| Loan Type | Typical Term | Interest Calculation | Payment Structure |
|---|---|---|---|
| Auto Loan | 2-7 years | Daily simple interest | Fixed monthly payments |
| Personal Loan | 1-5 years | Simple or compound | Fixed monthly payments |
| Promissory Note | Variable | Simple interest | Lump sum or periodic |
| Line of Credit | Revolving | Daily simple interest | Minimum payments |
Treasury Bills: Short-term government securities often use simple interest calculations.
Short-term CDs: Some certificates of deposit under 1 year use simple interest.
Money Market Accounts: May calculate interest using simple interest methods.
Bond Calculations: Used to calculate accrued interest between payment dates.
| Aspect | Advantages | Disadvantages |
|---|---|---|
| For Borrowers | Lower total interest, predictable costs, early payoff savings | Higher monthly payments for same term vs compound |
| For Lenders | Simple calculations, transparent terms | Lower returns vs compound interest |
| Calculations | Easy to understand and compute | Less growth potential for investments |
Total Interest = $20,000 × 0.06 × 4 = $4,800
Total Interest = $5,000 × 0.12 × 2 = $1,200
| Method | Formula | Use Case | Complexity |
|---|---|---|---|
| Simple Interest | I = P × r × t | Short-term loans, auto loans | Low |
| Compound Interest | A = P(1 + r)^t | Savings, investments, mortgages | Medium |
| Add-on Interest | Total = P + (P × r × t) | Installment loans | Low |
| Discount Interest | Interest deducted upfront | Short-term notes | Medium |
Lump Sum Payment: All principal and interest paid at maturity.
Monthly Payments: Interest calculated on declining balance as principal is repaid.
Interest-Only Payments: Principal remains constant, only interest paid periodically.
Balloon Payment: Small payments during term, large final payment.
Wrong Time Units: Mixing monthly rates with yearly time or vice versa.
Decimal Conversion: Forgetting to convert percentage to decimal (5% = 0.05).
Time Period Errors: Using wrong number of days in year (360 vs 365).
Confusing Simple vs Compound: Using wrong formula for the situation.
Payment Timing: Not accounting for when payments are made during the period.