Simple interest is charged on the amount you originally borrowed or invested, and on nothing else. Interest already earned never earns interest of its own, which makes it the easiest kind to work out — and, over long periods, much less powerful than compounding.
Key terms
- Principal — the original amount. In simple interest it never changes; only the total does.
- Rate — the annual percentage charged or earned.
- Term — how long, in years. Half-years and quarters work as decimals: 2.5 means two years and six months.
How it works
Multiply three things together. That is genuinely all there is to it.
Simple interest
I = P × r × t
P is the principal, r the annual rate as a decimal and t the time in years. The total owed or held is P + I.
$1,000 at 5% for three years earns $150 — $50 a year, every year, unchanged. The rate is applied to $1,000 each time, never to $1,050 or $1,100.
How it compares with compounding
The same $1,000 at 5% compounded annually reaches $1,157.63 instead of $1,150. The gap is $7.63 after three years, which looks trivial. It does not stay trivial: over thirty years, simple interest produces $2,500 while annual compounding produces $4,321.94.
That is why the calculator shows the difference alongside the answer. When you are earning, compounding is what you want. When you are borrowing, simple interest is the friendlier arrangement.
Where you will actually meet it
Simple interest turns up more often in borrowing than in saving. Many car loans and personal loans are simple-interest loans, meaning interest accrues on the outstanding balance and paying early genuinely reduces what you owe. Precomputed-interest loans work differently: the total interest is fixed at the start, so paying early saves you much less. The distinction is worth checking before signing.
How to use this calculator
- Enter the principal.
- Enter the annual rate as a percentage — 5, not 0.05.
- Enter the time in years, using decimals for part-years.
- Compare the interest with the “compounding yearly would add” figure to see what the arrangement is costing or saving you.
Frequently asked questions
Is simple interest better than compound interest?
It depends which side of it you are on. If you are borrowing, simple interest costs less. If you are saving or investing, compounding earns more. The same arrangement is good news or bad news depending on the direction the money is flowing.
How do I enter months?
As a fraction of a year. Six months is 0.5, nine months is 0.75, eighteen months is 1.5.
Do banks pay simple interest on savings?
Rarely. Most savings accounts compound, usually monthly or daily. Simple interest appears more often in short-term lending and in some bonds that pay a fixed coupon without reinvestment.
What is a simple-interest car loan?
One where interest accrues on the balance you still owe, so extra payments reduce both the balance and the interest that follows. It contrasts with precomputed interest, where the total is fixed at the outset and early repayment saves considerably less.
Does the calculator handle negative rates?
No — the rate is limited to zero or above. Negative interest is a specialised case that behaves differently enough to deserve its own treatment.
