What is simple interest?
Simple interest is interest worked out only on the money you originally put in — the principal — and never on the interest that money has already earned. Because the base never changes, the amount of interest added in each period is identical from start to finish. That predictability is exactly why simple interest is common for short-term loans, fixed deposits, and many car or personal loans.
Compound interest, by contrast, keeps adding each round of interest back into the balance so that future interest is calculated on a larger and larger figure. Over short periods the two are close; over long periods compound interest pulls well ahead.
How is simple interest calculated?
The core formula is I = P × r × t, where I is the interest, P is the principal, r is the annual rate written as a decimal, and t is the time in years. The final balance is simply the principal plus that interest: A = P × (1 + r × t).
For example, $1,000.00 at 6% for two years earns 1000 × 0.06 × 2 = $120.00 in interest, for a final balance of $1,120.00. Notice that each year contributes the same $60.00 — there is no snowball effect.
Solving for principal, rate or time
Because I = P × r × t is a single equation, you can rearrange it to find whichever value you are missing:
- Principal: P = I ÷ (r × t) — how much you would need to deposit to earn a target amount of interest.
- Rate: r = I ÷ (P × t) — the rate an investment must pay to reach a goal.
- Time: t = I ÷ (P × r) — how long it takes to earn a given amount of interest.
For instance, to earn $600.00 of interest on $4,000.00 at 5%, the time needed is 600 ÷ (4000 × 0.05) = 3 years.
Example: $10,000 at 5% for 5 years
The table below is produced by the same engine that powers the calculator above. The yearly interest stays flat at exactly $500.00 because it is always 5% of the original $10,000.00 — never more, never less.
| Year | Interest | Total interest | Balance |
|---|---|---|---|
| 1 | $500.00 | $500.00 | $10,500.00 |
| 2 | $500.00 | $1,000.00 | $11,000.00 |
| 3 | $500.00 | $1,500.00 | $11,500.00 |
| 4 | $500.00 | $2,000.00 | $12,000.00 |
| 5 | $500.00 | $2,500.00 | $12,500.00 |
Simple vs compound: a side-by-side
The gap between the two methods is small at first and then widens relentlessly. Here is $10,000.00 at 5%, calculated both as flat simple interest and as interest compounded once a year:
| Years | Simple | Compound (annual) | Difference |
|---|---|---|---|
| 1 | $10,500.00 | $10,500.00 | $0.00 |
| 5 | $12,500.00 | $12,762.82 | $262.82 |
| 10 | $15,000.00 | $16,288.95 | $1,288.95 |
| 20 | $20,000.00 | $26,532.98 | $6,532.98 |
| 30 | $25,000.00 | $43,219.42 | $18,219.42 |
At one year they are identical. By thirty years compounding has earned thousands more. If you want to model that growth, switch to the Compound Interest Calculator; for interest credited every day, use the Daily Compound Interest Calculator.
Adding regular deposits or withdrawals
Real savings rarely sit untouched. If you pay money in on a schedule, switch the contributions control to Additions: each deposit raises the balance that earns interest from the moment it lands, though that interest is still simple. Choose Deductions to model regular withdrawals, which lower the interest-earning balance over time.
When is simple interest used?
You will most often meet simple interest on fixed-term deposits, treasury bills and corporate bonds that pay a flat coupon, short bridging loans, and many instalment loans for cars or appliances. Mortgages are a related case: they are typically amortised using a simple-interest calculation on the declining balance, so the interest portion of each payment shrinks as the loan is repaid.
Knowing whether an offer uses simple or compound interest lets you compare it fairly. This tool is for illustration only and is not financial advice.
Frequently asked questions
What is the difference between simple and compound interest?+
Simple interest is always calculated on the original principal alone, so the interest you earn each period stays the same. Compound interest is calculated on the principal plus any interest already added, so it grows faster over time. For the same rate and term, compound interest always ends up higher.
How is simple interest calculated?+
The formula is I = P × r × t, where P is the principal, r is the annual interest rate as a decimal, and t is the time in years. The final balance is the principal plus that interest: A = P × (1 + r × t).
How do I find the principal, rate or time from the formula?+
Rearrange I = P × r × t. To find the principal, P = I ÷ (r × t). To find the rate, r = I ÷ (P × t). To find the time, t = I ÷ (P × r). Each is just the interest divided by the product of the other two values.
Is a car loan simple or compound interest?+
Most car loans, and many personal and student loans, use simple interest: interest is charged on the outstanding principal and does not compound on itself. Credit cards are the common exception — they typically compound. Always check the loan agreement, since terminology varies.
Can I include regular deposits or withdrawals?+
Yes. Switch the contributions control to Additions or Deductions and choose an amount and frequency. Each addition increases the balance that earns interest from then on; each deduction reduces it. Interest is still simple — it is never charged on previously earned interest.
Does the compounding frequency matter for simple interest?+
No. Because simple interest never earns interest on itself, there is no compounding frequency to choose. Only the rate, the principal and the length of time affect the result.
What is the monthly interest figure?+
It is the interest earned in a single month on your initial principal: principal × annual rate ÷ 12. With a fixed principal and rate this amount is the same every month, which is what makes simple interest "simple".
Is simple interest better for a borrower or a saver?+
It depends which side you are on. For a borrower, simple interest is usually cheaper than compound interest because the debt never snowballs. For a saver, simple interest is worse than compound interest, because your earnings never go on to earn more themselves.
Does simple interest ever match compound interest?+
Only over a single compounding period. For the very first year at an annual rate they are identical; from the second period onward compound interest pulls ahead and the gap keeps widening for as long as the money stays invested.
Disclaimer
Sources
- Investopedia — Simple Interest: formula I = P × r × t, with examples
- Investor.gov (U.S. SEC) — Interest, compounding and the time value of money
Formula and data last reviewed by the TheCalculatorHive team on 2 July 2026. Figures are for general information, not professional advice.
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