How this calculator works
Simple interest applies a fixed rate to the original principal for every period, so the interest earned (or owed) each year is identical. It is the arithmetic behind short-term loans, some bonds, and back-of-envelope interest estimates, and it is easier to reason about than compound interest because there is no interest-on-interest effect to track.
The trade-off is that simple interest grows slower than compound interest at the same nominal rate once more than one period has passed, because compounding lets earlier interest start earning its own interest. For year one exactly, the two methods agree — the difference only appears from year two onward.
The formula
I = P × r × tTotal = P + IP is the principal, r the annual interest rate as a decimal (rate ÷ 100), and t the time in years. Interest accrues linearly: doubling the time doubles the interest.
Worked example: $1,000 at 5% for 3 years
- Convert the rate to a decimal: 5% = 0.05.
- Interest: I = 1,000 × 0.05 × 3 = $150.
- Total repaid or accumulated: 1,000 + 150 = $1,150.
- Compare with compound interest at the same 5% rate over 3 years, which would total about $1,157.63 — $7.63 more, purely from interest compounding annually instead of staying flat.
Frequently asked questions
How is simple interest different from compound interest?
Simple interest is calculated only on the original principal every period, so it grows linearly. Compound interest is calculated on the principal plus all previously earned interest, so it grows faster the longer the money is invested or owed.
Where is simple interest actually used?
Common examples include some auto loans, short-term promissory notes, and simple bonds. Many everyday savings and credit products actually use compound interest, so check the terms before assuming which applies.
Do simple and compound interest ever give the same answer?
Yes — over exactly one compounding period (for example, one year with annual compounding) both methods apply the rate once to the principal and produce an identical result. They diverge only from the second period onward.
Can time be entered as months instead of years?
Convert months to years first by dividing by 12 — for example, 18 months is 1.5 years. The formula only works correctly when the rate and the time period use the same unit (both annual, or both scaled consistently).
How do I find the interest rate if I already know the principal, interest earned, and time?
Rearrange the formula to solve for r: r = I ÷ (P × t). Using the worked example on this page — $150 of interest on a $1,000 principal over 3 years — the rate is 150 ÷ (1,000 × 3) = 0.05, or 5%, matching the rate used in that example.