Simple Interest Calculator
Plain interest on a fixed principal — no compounding. Calculate interest, final value or time-to-maturity.
The Simple Interest Formula
Simple interest uses one of the cleanest formulas in finance:
I = P × r × t
Where I is interest, P is principal, r is the annual rate (decimal), t is time in years. The final amount: A = P × (1 + r × t). The Wikipedia interest article covers historical use of simple interest from ancient Babylonia onward.
$10,000 at 6%, two different worlds
| Year | Simple Interest Balance | Compound Interest Balance |
|---|---|---|
| 0 | $10,000 | $10,000 |
| 5 | $13,000 | $13,382 |
| 10 | $16,000 | $17,908 |
| 20 | $22,000 | $32,071 |
| 30 | $28,000 | $57,435 |
At year 30, the compound version is worth more than double the simple version on the same principal at the same rate. This is exactly why "the rule of 72" applies to compound interest only — simple interest never doubles your money the way compounding does.
Where Simple Interest Is Used in Real Life
- Auto loans — most U.S. car loans use simple interest, calculated daily on the remaining principal
- Personal loans — many fixed-rate personal loans
- Short-term consumer credit — most retail finance offers
- Treasury bills — pay simple interest at maturity (zero-coupon)
- Some bonds — particularly short-term municipals
- Bridge loans — typically simple interest
Compounding products: savings accounts, CDs, credit cards (compound daily), mortgages (effectively compound monthly), investments. As a rough rule: if it's lending for a short period, expect simple interest; if it's growing money over time, expect compounding.
Frequently Asked Questions
Is simple interest better for the borrower or the lender?
For the borrower — over the same rate and term, you pay less interest with simple than with a compounding loan. For savers and investors, the opposite — you want compounding, since you're the lender in that case.
What if my time is in months, not years?
Convert to years: 6 months = 0.5 years, 18 months = 1.5 years. The formula uses time in the same units as the rate (annual rate → annual time). For a 4% annual rate over 90 days: I = P × 0.04 × (90/365).
How does a car loan use simple interest?
Most U.S. auto loans calculate interest daily on the outstanding principal. Each payment first covers accumulated interest, with the remainder reducing principal. Paying more than the minimum reduces interest going forward, since the principal drops faster.