What is Simple Interest?
Simple interest is a method of calculating interest where the interest amount is computed only on the original principal — not on previously earned interest. It is the most straightforward way to calculate interest and is commonly used for short-term loans, car loans, savings bonds and some personal loans.
Unlike compound interest which grows exponentially, simple interest grows in a straight line — making it easier to predict and calculate. This is why it is widely used in educational settings and for basic financial calculations.
Simple Interest Formula:
SI = P × R × T
Where:
P = Principal (initial amount)
R = Annual Interest Rate (as decimal)
T = Time (in years)
Total Amount = P + SI = P(1 + RT)
Example:
Principal = $10,000
Rate = 8% per year = 0.08
Time = 3 years
SI = $10,000 × 0.08 × 3 = $2,400
Total = $10,000 + $2,400 = $12,400
Simple Interest vs Compound Interest
The key difference between simple and compound interest is what the interest is calculated on. Simple interest is always calculated on the original principal only. Compound interest is calculated on the principal plus all previously accumulated interest — meaning your interest earns interest too. Over time compound interest grows significantly faster than simple interest.
Where is Simple Interest Used?
- Short-term personal loans and payday loans
- Auto loans — most car loans use simple interest
- Some savings accounts and certificates of deposit
- US Treasury bills and bonds
- Consumer installment loans
- Student loans in some countries
How to Calculate Simple Interest in Different Time Units
- Years — SI = P × R × T (T in years)
- Months — SI = P × R × (T/12)
- Days — SI = P × R × (T/365)
Frequently Asked Questions
What is the simple interest formula? +
The simple interest formula is SI = P × R × T, where P is the principal amount, R is the annual interest rate as a decimal and T is the time period in years. To find the total amount, use A = P + SI or A = P(1 + RT). For example, $5,000 at 6% for 2 years: SI = $5,000 × 0.06 × 2 = $600. Total = $5,600.
How is simple interest different from compound interest? +
Simple interest is calculated only on the original principal. Compound interest is calculated on the principal plus previously accumulated interest. Over time compound interest grows much faster because your interest earns additional interest. For borrowers, compound interest costs more. For investors, compound interest earns more.
How do I calculate simple interest for months? +
To calculate simple interest for months, use the formula SI = P × R × (T/12), where T is the number of months. For example, $10,000 at 8% for 6 months: SI = $10,000 × 0.08 × (6/12) = $10,000 × 0.08 × 0.5 = $400. Use our calculator and select "Months" as the time unit above.
Do car loans use simple or compound interest? +
Most car loans in the United States use simple interest — specifically a method called precomputed simple interest or actuarial method. This means interest accrues daily on the outstanding principal balance. Making payments early or extra payments directly reduces your principal and the total interest you pay.
What is the principal in simple interest? +
The principal is the original amount of money borrowed or invested — before any interest is added. In the simple interest formula SI = PRT, P represents the principal. Interest is always calculated as a percentage of this original principal amount, regardless of how much interest has already accumulated.