Interest on the principal, nothing more.
Simple interest is charged only on the money you started with, so it grows in a straight line. Enter any three values and solve for the fourth, then see exactly how much more compound interest would have earned.
Your numbers
Fill in principal, rate and time to find the interest.
What these numbers mean
Simple vs compound growth
Balance over the full term
The scorecard
Year-by-year balance
Simple interest adds the same amount every year, so the balance climbs in a straight line. Compound interest is shown alongside for contrast.
| Year | Interest that year | Simple balance | Compound balance | Compound ahead by |
|---|
Simple interest, explained
What Is Simple Interest?
Simple interest is a straightforward method of calculating the cost of borrowing or the return on an investment based solely on the original principal amount. Unlike compound interest, simple interest does not accumulate on previously earned interest. This makes it predictable and easy to calculate, with the interest amount remaining constant each period throughout the life of the loan or investment.
Simple Interest vs Compound Interest
The key difference is that simple interest is calculated only on the original principal, while compound interest is calculated on the principal plus all accumulated interest. Over short periods the difference is small, but over decades it becomes dramatic. For example, $10,000 at 5% for 30 years yields $15,000 in simple interest but grows to $43,219 with annual compounding, more than double the simple interest amount.
How to Calculate Simple Interest
The simple interest formula is I = P x R x T, where P is the principal amount, R is the annual interest rate expressed as a decimal, and T is the time in years. To find the total amount after interest, add the interest to the principal: A = P + (P x R x T). For example, borrowing $10,000 at 5% for 3 years results in $1,500 of interest and a total repayment of $11,500.
When Simple Interest Is Used in Practice
Simple interest is commonly used for short-term personal loans, auto loans, some US Treasury securities, and certain corporate bonds. Many consumer installment loans calculate interest on the original balance rather than the declining balance. Understanding whether a financial product uses simple or compound interest is critical for accurately comparing costs and returns across different options.
Common questions
What is the formula for simple interest?
Simple interest is calculated as I = P x R x T, where P is the principal amount, R is the annual interest rate (as a decimal), and T is the time in years. For example, $10,000 at 5% for 3 years yields $1,500 in interest.
Where is simple interest commonly used?
Simple interest is often used for short-term personal loans, auto loans, some Treasury bonds, and certain types of bank certificates. Most mortgages and credit cards use compound interest, not simple interest.
Is simple or compound interest better for savings?
Compound interest is better for savings because it earns interest on your accumulated interest. Simple interest only calculates interest on the original principal, so your earnings grow at a constant rate rather than accelerating over time.
Does simple interest change over time?
No. With simple interest, the interest amount is the same each year because it is always calculated on the original principal. This makes it predictable and easy to calculate, unlike compound interest which grows over time.
Estimates for planning only. Real loans and investments may use different day-count conventions, fees or compounding periods. Confirm the exact terms with your lender or bank before you commit.