What Is Simple Interest?
Simple interest is the most basic form of interest: it is calculated only on the original principal amount, never on interest that has already accrued. It is the interest model used by most short-term loans, car loans in some countries, savings bonds, and certain types of informal lending. Because interest never compounds, the total grows in a straight line — hence the name.
Simple interest is different from compound interest, which calculates interest on both the principal and the accumulated interest. Over short periods the difference is small; over long periods it is dramatic. For a 30-year investment, compounding can produce 2–3× more than simple interest on the same rate.
The simple interest formula
I = P × R × T
| Variable | Meaning |
|---|---|
| I | Interest earned (or paid) |
| P | Principal — the original amount |
| R | Annual interest rate as a decimal (5% = 0.05) |
| T | Time in years |
To get the total amount at maturity, add the interest back to the principal: A = P + I = P × (1 + R × T).
Worked example
You deposit $10,000 at 5% simple interest for 3 years:
- Interest = 10,000 × 0.05 × 3 = $1,500
- Total amount = 10,000 + 1,500 = $11,500
- Each year earns exactly $500 — the interest never grows
Compare to compound interest at the same 5% for 3 years: the balance would be $11,576.25 — about $76 more, because the interest earned in years 1 and 2 begins earning its own interest.
Simple vs compound interest
| Years | Simple (5% on $10k) | Compound (5%) | Difference |
|---|---|---|---|
| 1 | $10,500 | $10,500 | $0 |
| 5 | $12,500 | $12,762.82 | $262.82 |
| 10 | $15,000 | $16,288.95 | $1,288.95 |
| 20 | $20,000 | $26,532.98 | $6,532.98 |
| 30 | $25,000 | $43,219.42 | $18,219.42 |
At 5% over 30 years, compounding produces 73% more than simple interest. The gap widens exponentially with longer timeframes.
When simple interest applies
- Short-term loans. Bridge loans, payday loans, and most personal loans under 1 year.
- Car loans in many countries. Some jurisdictions calculate auto loan interest on a simple basis (flat rate) rather than a reducing balance.
- Savings bonds and CDs. Some government bonds pay simple interest annually on the original face value.
- Legal judgments. Court-awarded interest on unpaid debts is often calculated as simple interest at a statutory rate.
- Promissory notes. Private lending between individuals usually uses simple interest.
- Interest-only periods. The interest-only phase of certain mortgages behaves like simple interest.
Rate and time conventions
The formula assumes R is the annual rate and T is measured in years. If you enter months or days, they are converted to years:
| Unit | Conversion |
|---|---|
| Years | T stays the same |
| Months | T = months ÷ 12 |
| Days (ordinary) | T = days ÷ 360 |
| Days (exact) | T = days ÷ 365 |
Banks traditionally use a 360-day year (called the "ordinary interest" convention) which produces slightly higher interest than the 365-day exact method. This tool uses the exact 365-day calendar for simplicity.
Common use cases
Short-term Loans
Calculate interest on a personal or bridge loan.
Promissory Notes
Work out interest on private lending agreements.
Savings Bonds
Estimate returns on government-issued bonds.
Legal Judgments
Compute statutory interest on unpaid debts.
Education
Learn the P × R × T formula with worked examples.
Loan Comparison
Compare flat-rate offers against reducing-balance offers.
Privacy and accuracy
This simple interest calculator runs entirely in your browser. All calculations happen locally in JavaScript with no server calls. Nothing is uploaded, stored or logged — safe for confidential financial amounts and lending calculations.