Simple Interest Explained
What simple interest is, the formula behind it, where you'll encounter it, and how it differs from the compound interest that grows savings.
Not all interest compounds. Simple interest is the most straightforward kind: it’s calculated only on the original amount, never on interest already earned. Understanding it helps you read loan terms correctly and spot when a lender is (or isn’t) doing you a favour.
Example
This is a sample result, not your calculation. Enter your own values to replace it.
Choose what to work out, fill in the other three values, then press Calculate.
End Balance
Results
- —
- —
- End Balance
- —
- Total Interest
- —
Calculation steps
- Principal —
- Interest —
Principal Interest
Schedule
| Year | Interest | Balance |
|---|
Check your entries
Fill in the three values the chosen tab asks for. Simple interest only ever adds, so an end balance must be at least the principal.
The formula
Simple interest is I = P × r × t:
- P is the principal (the starting amount).
- r is the annual interest rate, as a decimal.
- t is the time in years.
Borrow $5,000 at 5% for 3 years and the interest is 5,000 × 0.05 × 3 = $750. You repay $5,750 — and because nothing compounds, it’s exactly $250 of interest each year.
Simple vs. compound
The difference is where the interest lands:
- Simple interest stays flat, always calculated on the original principal.
- Compound interest is calculated on the principal plus accumulated interest, so it accelerates over time.
Over a year or two the gap is small. Over decades it’s enormous — which is great for savings and painful for debt.
Where you’ll meet it
Simple interest shows up in some short-term and car loans, certain personal loans, and many bonds, which pay a fixed coupon on their face value. When it’s used, it generally works in the borrower’s favour compared with compounding, because the interest doesn’t snowball.
The bottom line
If you’re borrowing, simple interest is usually the friendlier structure. If you’re saving or investing, you want compounding on your side. Use the simple interest calculator for flat-interest loans, and the compound interest calculator for anything that grows on itself.
This is general educational information, not financial advice.