Simple Interest Calculator
The Simple Interest Calculator is a tool used to calculate the interest accrued on a loan or investment based on the principal amount, interest rate, and time period.
What is Simple Interest?
Interest is the cost you pay to borrow money or the compensation you receive for lending money. You might pay interest on an auto loan or credit card, or receive interest on cash deposits in interest-bearing accounts, like savings accounts or certificates of deposit (CDs).
Simple interest is interest that is only calculated on the initial sum (the "principal") borrowed or deposited. Generally, simple interest is set as a fixed percentage for the duration of a loan. No matter how often simple interest is calculated, it only applies to this original principal amount. In other words, future interest payments won't be affected by previously accrued interest.
Simple Interest Formula
The basic simple interest formula looks like this:
Simple Interest = Principal Amount × Interest Rate × Time
Our calculator will compute any of these variables given the other inputs.
Simple Interest Calculated Using Years
You may also see the simple interest formula written as:
I = Prt
In this formula:
- I = Total simple interest
- P = Principal amount or the original balance
- r = Annual interest rate
- t = Loan term in years
Under this formula, you can manipulate "t" to calculate interest according to the actual period. For instance, if you wanted to calculate interest over six months, your "t" value would equal 0.5.
Simple Interest for Different Frequencies
You may also see the simple interest formula written as:
I = Prn
In this formula:
- I = total interest
- P = Principal amount
- r = interest rate per period
- n = number of periods
Under this formula, you can calculate simple interest taken over different frequencies, like daily or monthly. For instance, if you wanted to calculate monthly interest taken on a monthly basis, then you would input the monthly interest rate as "r" and multiply by the "n" number of periods.
Simple Interest Examples
Let's review a quick example of both I=Prt and I=Prn.
I = Prt
For example, let's say you take out a $10,000 loan at 5% annual simple interest to repay over five years. You want to know your total interest payment for the entire loan.
To start, you'd multiply your principal by your annual interest rate, or $10,000 × 0.05 = $500.
Then, you'd multiply this value by the number of years on the loan, or $500 × 5 = $2,500.
Now that you know your total interest, you can use this value to determine your total loan repayment required. ($10,000 + $2,500 = $12,500.) You can also divide the value to determine how much interest you'd pay daily or monthly.
I = Prn
Alternatively, you can use the simple interest formula I=Prn if you have the interest rate per month.
If you had a monthly rate of 5% and you'd like to calculate the interest for one year, your total interest would be $10,000 × 0.05 × 12 = $6,000. The total loan repayment required would be $10,000 + $6,000 = $16,000.
What Financial Instruments Use Simple Interest?
Simple interest works in your favor as a borrower, since you're only paying interest on the original balance. That contrasts with compound interest, where you also pay interest on any accumulated interest. You may see simple interest on short-term loans.
For this same reason, simple interest does not work in your favor as a lender or investor. Investing in assets that don't offer compound growth means you may miss out on potential growth.
However, some assets use simple interest for simplicity — for example bonds that pay an interest coupon. Investments may also offer a simple interest return as a dividend. To take advantage of compounding you would need to reinvest the dividends as added principal.
By contrast, most checking and savings accounts, as well as credit cards, operate using compound interest.
Simple Interest Versus Compound Interest
Compound interest is another method of assessing interest. Unlike simple interest, compound interest accrues interest on both an initial sum as well as any interest that accumulates and adds onto the loan. (In other words, on a compounding schedule, you pay interest not just on the original balance, but on interest, too.)
Over the long run, compound interest can cost you more as a borrower (or earn you more as an investor). Most credit cards and loans use compound interest. Savings accounts also offer compounding interest schedules. You can check with your bank on the compounding frequency of your accounts.
Compound Interest Formula
The basic formula for compound interest is:
| A = P × (1 + |
|
)nt |
In this formula:
- A = ending balance
- P = Principal balance
- r = the interest rate (expressed as a decimal)
- n = the number of times interest compounds in a year
- t = time (expressed in years)
Note that interest can compound on different schedules – most commonly monthly or annually. The more often interest compounds, the more interest you pay (or earn). If your interest compounds daily, you'd enter 365 for the number of time interest compounds annually. If it compounds monthly, you'd input 12 instead.
Learn More About Compound Interest
Compound interest calculations can get complex quickly because it requires recalculating the starting balance every compounding period.
For more information on how compound interest works, we recommend visiting our compound interest calculator.
Which is Better for You: Simple or Compound Interest?
As a borrower, paying simple interest works in your favor, as you'll pay less over time. Conversely, earning compound interest means you'll net larger returns over time, be it on a loan, investment, or your regular savings account.
For a quick example, consider a $10,000 loan at 5% interest repaid over five years.
As established above, a loan this size would total $12,500 after five years. That's $10,000 on the original principal plus $2,500 in interest payments.
Now consider the same loan compounded monthly. Over five years, you'd repay a total of $12,833.59. That's $10,000 of your original principal, plus $2,833.59 in interest. Over time, the difference between a simple interest and compound interest loan builds up exponentially.
Simple Interest Calculator Example
| Data Input | Description | Example |
|---|---|---|
| Principal Amount | The initial amount of money borrowed or invested | $10,000 |
| Annual Interest Rate | The interest rate charged on the loan or earned on the investment per year | 5% |
| Time Period | The duration of the loan or investment in years | 3 |
| Data Output | Description | Example |
|---|---|---|
| Simple Interest | The amount of interest earned or paid based on the principal amount, interest rate, and time period | $1,500 |
| Final Amount | The total amount including the principal and simple interest | $11,500 |
In this example, the user would input the principal amount, annual interest rate, and time period. The simple interest would be calculated by multiplying the principal amount, interest rate, and time period. The final amount would be calculated by adding the principal amount and simple interest.
Please note that this is just an example table and the specific formulas and calculations may vary depending on the implementation of the Simple Interest Calculator.
