Simple Interest Calculator
Calculate simple interest in seconds. Enter the principal, rate, and time, and this tool applies the classic I = PRT formula to show interest earned or paid.
The Simple Interest Formula
Simple interest follows one equation: I = P × R × T. Principal (P) is the starting amount. Rate (R) is the annual interest rate expressed as a decimal (5% becomes 0.05). Time (T) is the duration in years. Multiply all three and you get the interest.
For example, $10,000 at 5% for 3 years: I = 10,000 × 0.05 × 3 = $1,500. Add that interest to the principal and you have $11,500 total. The calculation is the same whether you're earning interest on savings or paying interest on a loan.
This simplicity makes it easy to estimate costs and returns without a calculator. Double the time or double the rate, and the interest doubles. Triple the principal and the interest triples. The linear relationship is intuitive and predictable.
Where Simple Interest Is Used
Auto loans commonly use simple interest. When you make a payment, interest is calculated on the current principal balance only. Each payment reduces the principal, so the next month's interest charge is slightly lower. This is why most of your early payments go toward interest and later payments tackle principal.
Short-term personal loans and some student loans also use simple interest. Treasury bills and commercial paper use simple interest over their brief terms (days to one year). The absence of compounding makes these instruments straightforward to price and understand.
Savings accounts almost never use simple interest. Banks want to advertise competitive yields, and compound interest produces higher returns, making accounts more attractive. Simple interest survives mainly in lending, where borrowers benefit from lower costs.
Simple vs. Compound Interest Over Time
Over short periods, simple and compound interest produce nearly identical results. For one year, they're often exactly the same. The difference emerges over multiple years, especially at higher rates.
Consider $10,000 at 5% for 10 years. Simple interest yields $5,000 (I = 10,000 × 0.05 × 10), for a total of $15,000. Compound interest (annually) yields $6,289, for a total of $16,289. That's an extra $1,289 from compounding.
The gap widens with more frequent compounding and higher rates. At 10% over 20 years, simple interest produces $20,000 in interest. Compound interest (annually) produces $57,275. The difference becomes dramatic because compounding turns interest into principal, which then generates its own interest in a snowball effect.
Frequently Asked Questions
What is simple interest?
Simple interest is calculated only on the original principal, not on accumulated interest. The formula is I = P × R × T, where P is principal, R is annual rate (as a decimal), and T is time in years.
How does simple interest differ from compound interest?
Simple interest never changes because it's always calculated on the original principal. Compound interest grows because each period's interest is added to the principal, and future interest is calculated on the new, larger balance.
What types of loans use simple interest?
Auto loans, short-term personal loans, and some student loans use simple interest. Credit cards and mortgages typically use compound interest or daily compounding methods. Simple interest is more common in shorter-term lending.
Can simple interest apply to fractions of a year?
Yes. If you borrow for 6 months, use T = 0.5 years. For 90 days, use T = 90/365 = 0.2466 years. The formula works with any time period expressed in years or fractions of years.
Is simple interest better for borrowers or savers?
Better for borrowers, worse for savers. Borrowers pay less total interest with simple interest because interest doesn't compound. Savers earn less because their interest doesn't generate additional interest. Most financial products today use compound interest.