Simple Interest Calculator
Calculate simple interest on your principal amount. Unlike compound interest, simple interest is calculated only on the initial principal.
| Year | Start | Interest | Contributions | End Balance |
|---|---|---|---|---|
| 1 | $10,000 | +$500 | - | $10,500 |
| 2 | $10,500 | +$500 | - | $11,000 |
| 3 | $11,000 | +$500 | - | $11,500 |
| 4 | $11,500 | +$500 | - | $12,000 |
| 5 | $12,000 | +$500 | - | $12,500 |
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What is Simple Interest?
Simple interest is interest calculated only on the original principal amount. Unlike compound interest, where earned interest is added to the principal and earns more interest, simple interest remains constant throughout the investment or loan period.
Think of it like this: If you lend a friend $100 at 10% simple interest per year, they owe you $10 each year – no matter how many years pass. The interest never "grows on itself."
The Simple Interest Formula
The formula for simple interest is straightforward:
Where:
- I = Interest earned (or owed)
- P = Principal (initial amount)
- r = Annual interest rate (as a decimal)
- t = Time in years
To find the total amount (principal + interest):
Simple Interest vs Compound Interest
The key difference: simple interest grows linearly, compound interest grows exponentially.
Example: $10,000 at 5% for 10 years
| Type | Formula | Result | Interest Earned |
|---|---|---|---|
| Simple | $10,000 × (1 + 0.05 × 10) | $15,000 | $5,000 |
| Compound (annually) | $10,000 × (1.05)^10 | $16,289 | $6,289 |
The longer the time period, the bigger the difference becomes. After 30 years:
- Simple: $25,000 (+$15,000)
- Compound: $43,219 (+$33,219)
Simple interest may seem "worse" for investors, but it's actually better for borrowers! Short-term loans with simple interest can be cheaper than compound interest loans.
Where is Simple Interest Used?
Simple interest is more common than you might think:
- Auto loans – Many car loans use simple interest
- Short-term personal loans – Loans under 1 year often use simple interest
- Treasury bills – U.S. government short-term securities
- Some certificates of deposit (CDs) – Especially short-term CDs
- Consumer installment loans – Including some mortgages
Calculating for Partial Years
Simple interest makes partial-year calculations easy:
Example: $5,000 at 6% for 90 days
I = $5,000 × 0.06 × (90/365) = $73.97
This straightforward calculation is why simple interest is popular for short-term financial products.
Tips for Using Simple Interest
- Compare APR carefully – A 5% simple interest loan may cost less than a 4.5% compound interest loan over the same period
- Pay early when borrowing – With simple interest loans, paying early reduces total interest paid
- Understand the terms – Some "simple interest" products actually compound monthly – always read the fine print
- Use for short-term planning – Simple interest is most accurate for periods under 1 year
- Consider inflation – Use the inflation adjustment feature to see real purchasing power