Simple Interest Calculator
Calculate simple interest for loans or investments.
Interest Earned
$1,500
Simple Interest Formula
I = Interest amount
P = Principal (initial amount)
R = Rate (annual, as decimal)
T = Time (in years)
Simple vs Compound Interest
With compound interest (monthly), you would earn $1,614.72 instead of $1,500.
Related Calculators
About This Calculator
Simple interest—calculated using the straightforward formula I = P × R × T—is the foundation of all financial mathematics, yet it's rarely encountered in its pure form in modern banking. While compound interest dominates savings accounts and most loans, understanding simple interest remains essential for auto loans, some personal loans, Treasury bills, and short-term corporate debt. This Simple Interest Calculator computes interest using the classic formula, helping you understand the difference between simple and compound growth.
Enter your principal amount, interest rate, and time period to instantly see the interest earned or owed and the total amount. Use this calculator to solve for any variable—principal, rate, time, or interest amount—making it perfect for educational purposes, loan comparisons, and understanding how straightforward interest works before tackling compound interest.
Historically, simple interest was the only form of interest that existed. Ancient civilizations from Babylon to Rome calculated interest linearly. The concept of compound interest—"interest on interest"—emerged gradually, with the first recorded compound interest tables appearing in medieval Italy. Today, understanding simple interest helps you recognize when lenders use it (often on short-term or auto loans) and how it compares to compound interest on the same terms.
How to Use the Simple Interest Calculator
- 1Enter the principal amount (P)—this is the original sum you're borrowing or investing.
- 2Input the annual interest rate (R) as a percentage—the calculator converts it to a decimal automatically.
- 3Enter the time period (T) in years—for months, divide by 12; for days, divide by 365.
- 4View the interest earned or owed (I) and the total amount (A = P + I).
- 5Use "Solve For" mode to find any missing variable when you know the other three.
- 6Compare simple vs. compound interest results to understand the difference over time.
- 7For loans with simple interest, see how extra payments reduce total interest paid.
Formula
I = P × R × TThe simple interest formula is the most fundamental calculation in finance. I (Interest) equals P (Principal—your initial amount) times R (Rate—the annual interest rate as a decimal) times T (Time—in years). Unlike compound interest, which calculates interest on accumulated interest, simple interest is calculated only on the original principal throughout the entire period. This creates linear growth: at 5% simple interest, $1,000 earns exactly $50 per year, every year, regardless of how long it's invested.
The Simple Interest Formula Explained
The Core Formula: I = P × R × T
Where:
- I = Interest (amount earned or owed)
- P = Principal (initial amount)
- R = Rate (annual interest rate as decimal: 5% = 0.05)
- T = Time (in years)
Total Amount Formula: A = P + I = P(1 + RT)
Solving for Each Variable:
| Find | Formula | Example |
|---|---|---|
| Interest | I = P × R × T | $5,000 × 0.06 × 3 = $900 |
| Principal | P = I ÷ (R × T) | $900 ÷ (0.06 × 3) = $5,000 |
| Rate | R = I ÷ (P × T) | $900 ÷ ($5,000 × 3) = 0.06 = 6% |
| Time | T = I ÷ (P × R) | $900 ÷ ($5,000 × 0.06) = 3 years |
Step-by-Step Example: Calculate interest on $10,000 at 8% annual rate for 2.5 years:
- P = $10,000
- R = 8% = 0.08
- T = 2.5 years
- I = $10,000 × 0.08 × 2.5
- I = $2,000
Total amount: A = $10,000 + $2,000 = $12,000
Key Insight: With simple interest, each year contributes the same amount of interest. At 8%, $10,000 earns exactly $800 per year, regardless of accumulated interest.
Converting Time Periods
Time Conversions for the Formula
The simple interest formula requires time in years. Here's how to convert:
Common Conversions:
| Time Period | Conversion | Example |
|---|---|---|
| Months | Divide by 12 | 6 months = 6/12 = 0.5 years |
| Days | Divide by 365 | 90 days = 90/365 = 0.247 years |
| Weeks | Divide by 52 | 13 weeks = 13/52 = 0.25 years |
Monthly Examples:
- 1 month = 1/12 = 0.0833 years
- 3 months = 3/12 = 0.25 years
- 6 months = 6/12 = 0.5 years
- 9 months = 9/12 = 0.75 years
- 18 months = 18/12 = 1.5 years
- 30 months = 30/12 = 2.5 years
Day Count Conventions:
Different industries use different day counts:
- Actual/365: Most common—use actual days ÷ 365
- Actual/360: Banking convention—use actual days ÷ 360
- 30/360: Corporate bonds—assume 30 days per month
Example Using 30/360: February 15 to May 15 = 3 months = 90 days 90 ÷ 360 = 0.25 years
Example Using Actual/365: February 15 to May 15 = 89 actual days 89 ÷ 365 = 0.244 years
Practical Calculation: $20,000 loan at 9% for 180 days:
- Using Actual/365: I = $20,000 × 0.09 × (180/365) = $887.67
- Using 30/360: I = $20,000 × 0.09 × (180/360) = $900.00
The difference ($12.33) matters at scale or in precise financial contracts.
Simple Interest vs. Compound Interest
The Fundamental Difference
Simple interest: Interest calculated only on the original principal Compound interest: Interest calculated on principal PLUS accumulated interest
Side-by-Side Comparison: $10,000 at 8% Annual Rate
| Year | Simple Interest | Compound Interest (Annual) |
|---|---|---|
| 1 | $10,800 | $10,800 |
| 2 | $11,600 | $11,664 |
| 3 | $12,400 | $12,597 |
| 5 | $14,000 | $14,693 |
| 10 | $18,000 | $21,589 |
| 20 | $26,000 | $46,610 |
| 30 | $34,000 | $100,627 |
Year-by-Year Interest Earned:
| Year | Simple (Annual) | Compound (Annual) |
|---|---|---|
| 1 | $800 | $800 |
| 5 | $800 | $1,088 |
| 10 | $800 | $1,599 |
| 20 | $800 | $3,454 |
| 30 | $800 | $7,458 |
Key Observations:
- Year 1: Identical results (no prior interest to compound)
- Short-term (1-3 years): Difference is minimal
- Long-term (10+ years): Compound interest pulls dramatically ahead
- 30 years: Simple = $34,000, Compound = $100,627 (3x more!)
The Math Behind the Difference:
- Simple: Growth is linear (straight line on a graph)
- Compound: Growth is exponential (accelerating curve)
When Does This Matter?
- Short-term loans: Difference is negligible
- Long-term investments: Compound interest is essential
- Understanding loan terms: Know which type you're getting
Where Simple Interest Is Actually Used
Real-World Applications of Simple Interest
Despite compound interest dominating modern finance, simple interest remains common in specific situations:
Auto Loans (Most Common) Most car loans calculate interest as simple interest:
- Interest is calculated on the remaining principal balance
- Paying early reduces total interest significantly
- "Simple interest method" vs. "precomputed interest"
Example: $25,000 car loan at 6% for 48 months Monthly payment: $587.28 Total interest (simple method): $3,189 If paid off at month 24: ~$1,600 interest saved
Treasury Bills (T-Bills) U.S. government short-term debt uses simple interest pricing:
- Sold at discount to face value
- Mature in 4, 8, 13, 26, or 52 weeks
- Interest = Face Value - Purchase Price
Example: $10,000 T-bill at 5% for 26 weeks Purchase price: $10,000 - ($10,000 × 0.05 × 0.5) = $9,750
Short-Term Personal Loans Some personal loans, especially:
- Payday alternatives from credit unions
- Short-term business loans
- Bridge loans
Certificates of Deposit (Some) Some CDs pay simple interest:
- Interest paid monthly or quarterly (not reinvested)
- Lower effective yield than compound CDs
Invoice Factoring Business financing where invoices are sold:
- Fee often calculated as simple interest on advance
- Typical rates: 1-5% per month
Educational Loans (Some) Certain student loans during:
- Grace periods
- Deferment periods
- (Note: Most student loans compound quarterly or capitalized at certain points)
Key Takeaway: Always ask whether interest is simple or compound when taking a loan. Simple interest loans reward early payoff; some compound interest loans don't.
Simple Interest Loan Payoff Strategies
How to Minimize Interest on Simple Interest Loans
Because simple interest is calculated on the remaining principal balance, paying early saves money directly.
Strategy 1: Make Extra Principal Payments
$30,000 auto loan at 7% for 60 months: Standard payment: $594.04/month
| Strategy | Total Interest | Time to Payoff | Savings |
|---|---|---|---|
| Minimum payments | $5,643 | 60 months | - |
| +$50/month | $4,730 | 52 months | $913 |
| +$100/month | $4,052 | 47 months | $1,591 |
| +$200/month | $3,085 | 40 months | $2,558 |
Strategy 2: Pay Biweekly Instead of Monthly
By paying half your monthly payment every two weeks, you make 26 half-payments = 13 full payments per year (one extra payment).
$30,000 loan at 7% for 60 months:
- Monthly payments: 60 months, $5,643 total interest
- Biweekly payments: 54 months, $5,051 total interest
- Savings: $592 and 6 months earlier payoff
Strategy 3: Round Up Payments
Instead of $594.04, pay $600 or $650:
- $600/month: Saves $208 and 2 months
- $650/month: Saves $613 and 5 months
- $700/month: Saves $958 and 8 months
Strategy 4: Make Lump Sum Principal Payments
Tax refund, bonus, or windfall applied to principal: $2,000 lump sum in month 12:
- Reduces payoff by ~5 months
- Saves ~$350 in interest
Important: Verify Loan Terms
- Ensure extra payments go to principal (not future payments)
- Check for prepayment penalties (rare but possible)
- Request principal-only payment option if available
Why This Works: With simple interest, reducing principal immediately reduces future interest. Every dollar of extra payment saves you interest from that point forward.
Calculating Effective Annual Rate
Converting Simple Interest to Comparable Rates
When comparing loans with different terms, convert to effective annual rate (EAR) or annual percentage rate (APR).
Simple Interest Rate to APR:
For simple interest loans, the stated rate IS the APR (no compounding).
- 6% simple interest for 1 year = 6% APR
- 6% simple interest for 6 months = 6% APR (annualized)
Calculating Interest for Partial Years:
| Term | Rate | Formula | Interest on $10,000 |
|---|---|---|---|
| 1 year | 6% | P × 0.06 × 1 | $600 |
| 6 months | 6% | P × 0.06 × 0.5 | $300 |
| 90 days | 6% | P × 0.06 × (90/365) | $147.95 |
| 30 days | 6% | P × 0.06 × (30/365) | $49.32 |
Comparing Simple vs. Compound APY:
What compound rate equals 6% simple for different terms?
| Term | 6% Simple | Equivalent Compound Rate |
|---|---|---|
| 1 year | 6% | 6.00% |
| 6 months | 3% actual | 6.09% APY |
| 3 months | 1.5% actual | 6.14% APY |
| 1 month | 0.5% actual | 6.17% APY |
Formula for Compound Equivalent: APY = (1 + rate per period)^periods per year - 1
For 0.5% monthly simple interest: APY = (1.005)^12 - 1 = 6.17%
Practical Example: Two loan offers:
- Bank A: 5.9% simple interest, 48 months
- Bank B: 5.7% compound monthly, 48 months
Total interest on $20,000:
- Bank A: $20,000 × 0.059 × 4 = $4,720
- Bank B: $20,000 × [(1.00475)^48 - 1] = $5,088
Bank A is cheaper despite higher stated rate because simple interest doesn't compound.
Common Simple Interest Problems
Solving Real-World Simple Interest Questions
Problem 1: Finding Principal "I earned $450 in interest at 5% annual rate over 3 years. What was my principal?"
P = I ÷ (R × T) P = $450 ÷ (0.05 × 3) P = $450 ÷ 0.15 P = $3,000
Problem 2: Finding Interest Rate "A $8,000 investment earned $1,200 over 2.5 years. What was the annual rate?"
R = I ÷ (P × T) R = $1,200 ÷ ($8,000 × 2.5) R = $1,200 ÷ $20,000 R = 0.06 = 6%
Problem 3: Finding Time "How long will it take for $5,000 to earn $750 at 4% simple interest?"
T = I ÷ (P × R) T = $750 ÷ ($5,000 × 0.04) T = $750 ÷ $200 T = 3.75 years (3 years, 9 months)
Problem 4: Finding Interest Owed "Calculate interest on a $15,000 loan at 8.5% for 18 months."
I = P × R × T I = $15,000 × 0.085 × 1.5 I = $1,912.50
Problem 5: Mixed Time Units "What's the interest on $25,000 at 7.2% from March 1 to September 15?"
Days from March 1 to September 15 = 198 days T = 198 ÷ 365 = 0.5425 years I = $25,000 × 0.072 × 0.5425 I = $976.50
Problem 6: Finding Total Amount Needed "You need to repay $12,000 in 2 years. At 6% simple interest, how much can you borrow today?"
A = P(1 + RT) $12,000 = P(1 + 0.06 × 2) $12,000 = P × 1.12 P = $12,000 ÷ 1.12 P = $10,714.29
Pro Tips
- 💡Always convert your time period to years before using the formula. Divide months by 12 and days by 365 to avoid calculation errors.
- 💡For simple interest auto loans, every extra dollar you pay toward principal immediately reduces your future interest charges. Pay early when possible.
- 💡Use the Rule of 100 to quickly estimate doubling time: at 5% simple interest, money doubles in 20 years (100 ÷ 5 = 20).
- 💡When comparing loan offers, check whether interest is simple or compound. Simple interest loans typically cost less over the life of the loan.
- 💡For short-term investments (under 1 year), the difference between simple and compound interest is minimal—don't overthink it.
- 💡Remember that simple interest creates linear growth (same interest each period), while compound creates exponential growth (accelerating over time).
- 💡T-bills and short-term Treasury securities use simple interest pricing—useful knowledge for conservative investors.
- 💡If your loan uses simple interest and allows extra payments, making biweekly payments instead of monthly adds one extra payment per year and reduces total interest.
- 💡To find any unknown variable (P, R, T, or I), just rearrange the formula: I = PRT. If you know three values, you can always find the fourth.
- 💡For loans with simple interest, paying before the due date saves money because interest is calculated daily on the remaining balance.
Frequently Asked Questions
Simple interest is calculated only on the original principal throughout the loan or investment period—you earn/owe the same amount of interest each period. Compound interest is calculated on the principal plus any accumulated interest, meaning you earn "interest on interest." Example: $10,000 at 6% for 10 years. Simple interest: $6,000 total interest ($600/year × 10). Compound interest (annual): $7,908 total interest. Over short periods (1-3 years), the difference is small. Over long periods (10+ years), compound interest grows dramatically larger.
