Calculate interest earned or owed using the simple interest formula: I = P × r × t.
How Simple Interest Works
Simple interest calculates interest only on the original principal — earned interest is never added back. The formula is: I = P × r × t, where P is principal, r is the annual rate as a decimal, and t is time in years.
For example: $10,000 at 5% for 3 years → I = 10,000 × 0.05 × 3 = $1,500 interest. Total amount: $11,500.
Simple vs Compound: How Much Does It Matter?
Using $10,000 principal at 5% annual rate — the difference is small early on, but grows dramatically over time:
| Years | Simple Interest Total | Compound Interest Total | Difference |
|---|
| 1 | $10,500 | $10,500 | $0 |
| 5 | $12,500 | $12,763 | $263 |
| 10 | $15,000 | $16,289 | $1,289 |
| 20 | $20,000 | $26,533 | $6,533 |
| 30 | $25,000 | $43,219 | $18,219 |
Frequently Asked Questions
What is simple interest?
Simple interest is calculated only on the original principal amount. The formula is I = P × r × t. Unlike compound interest, earned interest is not added back to the principal.
What is the difference between simple and compound interest?
Simple interest is calculated on the principal only. Compound interest is calculated on the principal plus previously earned interest. Over time, compound interest grows exponentially while simple interest grows linearly.
Where is simple interest used?
Simple interest is commonly used for car loans, short-term personal loans, some bonds, and certificates of deposit. Mortgages and savings accounts typically use compound interest.
How do you calculate simple interest for months?
Convert months to years by dividing by 12. For example, 6 months = 0.5 years. Then use the formula I = P × r × t.
Is simple interest better for borrowers or lenders?
Simple interest is generally better for borrowers because total interest paid is lower than with compound interest. For savers and lenders, compound interest earns more over time.