Simple Interest Calculator

About this Simple Interest Calculator

The Simple Interest Calculator uses the basic P × R × T formula, where interest is calculated only on the original principal. Unlike compound interest, previously earned interest does not become part of the interest-bearing balance.

Simple interest, calculated only on the original principal and never on previously accumulated interest, is used for certain short-term loans, some bonds, and basic educational examples, making it an important contrast to compound interest.

For related tasks, try Compound Interest Calculator, Loan EMI Calculator or Investment Return Calculator.

How to use it

1. Enter the original principal.
2. Enter the annual rate and time in years.
3. Calculate to view interest and principal plus interest.

Practical example

For a principal of 10,000 at 6% per year for three years, simple interest is 1,800 and the final amount is 11,800.

5,000 at 6% simple interest for 4 years earns exactly 1,200 in interest, a straightforward linear calculation, compared to about 1,312 that the same principal and rate would earn under annual compound interest over the same 4 years.

Things to double-check

Simple interest grows linearly while compound interest grows exponentially, so for any loan or investment running longer than a single period, always check which method actually applies, since the difference compounds significantly over time.

The simple interest formula

Simple interest equals principal times rate times time. A 25,000 deposit at 9 percent for two and a half years earns 25,000 times 0.09 times 2.5, which is 5,625, so the total is 30,625. Because interest is calculated only on the original amount, each year adds the same sum. That is different from compound interest, where interest is added to the balance and earns more interest. For short periods the two are close, but over many years the gap becomes large.

Converting time correctly

The time must match the rate, which is usually quoted per year. For months, divide by 12, so 6 months is 0.5. For days, divide by 365 (some lenders use 360). Interest on 25,000 at 9 percent for 90 days is 25,000 times 0.09 times 90 divided by 365, which is about 554.79. Mixing units is the most common error, such as entering 6 as years instead of months. Check the result against a rough estimate: half a year at 9 percent should be about 4.5 percent of the principal.

Where simple interest is used

Simple interest appears in short-term loans, some bonds that pay a fixed coupon, certain deposits of less than a year, late payment charges and informal loans between people. It is also the usual teaching example because the arithmetic is easy. Many bank loans and savings accounts, however, use compounding or reducing balances, so do not assume a quoted rate is simple. Ask how interest is calculated and how often it is added, and compare offers on an equal basis.

The flat-rate loan trap

Some loans are advertised with a flat rate, which applies the percentage to the full original amount for the whole term even as you repay it. A 100,000 loan at a flat 10 percent for 3 years carries 30,000 of interest, so the repayment is 130,000, or about 3,611 a month. Because you owe less each month, the true cost is higher than 10 percent. That payment is equivalent to a reducing-balance rate of about 18 percent a year. Always ask for the annual percentage rate before you compare.

Simple and compound interest over time

The difference between simple and compound interest grows with time. On 10,000 at 8 percent, simple interest after 10 years gives 18,000 in total, while compounding annually gives about 21,589. After 30 years, simple interest gives 34,000 but compounding gives about 100,627, nearly three times as much. Over one year the two are identical. This is why short-term loans are often priced on simple interest while long-term investments are described with compound growth. Always ask which method applies before you compare two offers.

Worked example: a loan from a relative

Suppose a relative lends you 20,000 for 18 months at a simple interest rate of 6 percent a year. The interest is 20,000 times 0.06 times 1.5, which is 1,800, so the total to repay is 21,800. If you repay in equal monthly instalments, each is 1,211.11. A written note with the amount, the rate, the dates and the repayment plan avoids misunderstandings and keeps relationships healthy. If you also agree that the interest runs on the remaining balance as you repay, the interest would be lower than 1,800, so be clear about which method you mean before you sign.

Interest on short deposits and bills

Short-term deposits and treasury bills are often quoted using simple interest and a day count. A deposit of 50,000 at 7 percent for 45 days earns 50,000 times 0.07 times 45 divided by 365, which is about 431.51. Some markets use a 360 day year, which gives a slightly higher figure, 437.50. The difference seems small, but on large sums it matters, so check the day-count convention that applies. When you compare deposits of different lengths, convert them to the same yearly rate so that a 45 day offer can be compared fairly with a 90 day one.

Simple interest on late payments

Late payment charges are often calculated as simple interest. An invoice of 5,000 with a late fee of 1.5 percent a month adds 75 each month, so after four months the fee is 300. If the same rate compounded monthly, the fee would be about 306.80, which is only slightly higher over four months but grows faster over a longer time. If you issue invoices, state the late fee clearly in your terms. If you receive one, check how the fee is calculated and whether it is allowed under local law, since some places limit the rate that may be charged.

Checking how a lender calculates interest

To find out whether a loan uses simple, flat or reducing-balance interest, ask for the repayment schedule and the annual percentage rate. If the total repayment equals the principal plus the rate times the term times the principal, it is a flat or simple loan, and the true annual cost is higher than the stated rate because you repay part of the principal each month. A 100,000 loan at a flat 10 percent for three years costs 30,000 in interest, which works out to roughly 18 percent a year on the declining balance. Always compare loans using the annual percentage rate and the total amount repaid.

Key terms explained

The principal is the amount lent or deposited. The rate is the yearly percentage, and time is measured in years, so months must be divided by 12 and days by 365. Simple interest equals principal times rate times time, and the total amount equals principal times one plus rate times time. A flat rate charges interest on the original amount throughout a loan, which makes the true cost higher than it looks. The day-count convention states whether a year has 365 or 360 days. Accrued interest is interest earned but not yet paid.

Rules of thumb and quick checks

At 10 percent simple interest, 1,000 earns 100 a year, about 0.27 a day, and it takes ten years to earn an amount equal to the principal. At 6 percent for 6 months, interest is 3 percent of the principal. If a quoted total repayment equals principal plus rate times years times principal, the loan uses flat interest, and the real annual cost is roughly double the quoted rate for a loan repaid in equal instalments. Always ask for the annual percentage rate to compare offers fairly.

Read the full guide

Want the background, a step-by-step example and the common mistakes? Read How to Calculate Loan EMI: Formula, Worked Example and Tips. Learn the EMI formula with a step-by-step example, see how interest and principal change monthly, and compare flat and reducing balance rates.

Frequently asked questions