Quick answer: Simple interest is calculated only on the original principal: interest equals principal times annual rate times years. The total repayment is principal plus interest. Unlike compound interest, earnings are not reinvested, so growth is linear. It applies to some short-term loans, car loans and straightforward savings estimates.
Last reviewed: September 2026
Key facts
- Interest = principal × rate × time — charged only on the original amount.
- Unlike compound interest, earned interest never starts earning its own interest.
- Common in short-term loans, some auto loans and textbook problems.
- Convert months to years first: 6 months = 0.5 years.
Simple interest is the straightforward kind — charged only on the original principal, never on accumulated interest. This free simple interest calculator finds the interest earned and the total amount from the principal, annual rate and time in years.
It is ideal for short-term loans, car loans quoted on a simple basis, and homework problems where the formula I = P × r × t is all you need.
How to use
- Enter the principal amount.
- Add the annual interest rate and the time in years.
- The interest earned and total amount appear instantly.
Simple interest formula
| Term | Meaning |
|---|---|
| I | Interest earned. |
| P | Principal — the starting amount. |
| r | Annual rate as a decimal (5% = 0.05). |
| t | Time in years. |
Growth is a straight line: each year adds the same P × r, unlike compound interest which curves upward.
Worked examples
Three-year loan
$5,000 at 5% for 3 years: I = 5000 × 0.05 × 3 = $750.
Total repaid: 5000 + 750 = $5,750.
Six-month term
$2,000 at 4.5% for 6 months (0.5 years): I = 2000 × 0.045 × 0.5 = $45.
Total: $2,045. Always convert months to years before multiplying.
Simple vs compound interest
| Feature | Simple interest | Compound interest |
|---|---|---|
| Charged on | Original principal only | Principal + past interest |
| Growth shape | Straight line | Curving upward |
| Formula | I = P×r×t | A = P(1+r/n)nt |
| $1,000 at 10%, 3 yrs | Interest $300 | Interest $331 (yearly) |
| Typical use | Short loans, textbooks | Savings, mortgages, investments |
Frequently asked questions
Where is simple interest used?
Short-term personal loans, some auto loans and many textbook problems. Most savings accounts and mortgages use compound interest instead.
How is simple interest different from compound interest?
Simple interest never earns interest on past interest, so it grows in a straight line. Compound interest grows faster because each period’s gains compound.
Can the time be in months?
Yes — convert months to years first (6 months = 0.5 years) before using the formula.
What does “per annum” mean?
Per year. A 5% per annum rate applied for 6 months earns half a year’s interest.
Is simple interest ever better for the borrower?
Yes — on a loan, simple interest costs less than compound interest at the same rate, because interest doesn’t compound against you.
Sources
- NerdWallet — Simple vs compound interest
- Bankrate — Interest calculation basics
Key takeaways
- I = P × r × t; total = principal + interest.
- Convert months to years before multiplying.
- For long-term savings, compare with the Compound Interest Calculator — compounding wins over time.
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