How Simple Interest Is Calculated
Simple interest is the most straightforward form of interest calculation. It is calculated only on the original principal amount, not on any accumulated interest. Simple interest is commonly used for short-term loans, car loans, savings bonds, and some types of bank accounts. Because interest does not compound, the total interest earned or paid is directly proportional to the principal, rate, and time.
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Formula
Simple Interest Calculator
Calculate simple interest earned on a principal over a given time.
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Worked Example
Given:
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FAQs
When is simple interest used in real life?
Simple interest is used for most car loans, personal loans, some mortgages, and short-term credit. It is also used for US Treasury bills and savings bonds. Credit cards, however, typically use compound interest, which accrues daily.
Is simple interest always better than compound interest?
For borrowers, simple interest is better because you pay less over time. For investors, compound interest is better because you earn more. The difference becomes larger over longer time periods and at higher interest rates.
How do I convert an annual rate to a monthly or daily rate?
Divide the annual rate by 12 for a monthly rate, or by 365 for a daily rate. For example, 12% per year = 1% per month = 0.0329% per day. Always ensure your time unit matches your rate unit in the formula.