How simple interest is calculated
Simple interest charges the rate on the original principal only, never on interest that has already built up. The calculator takes three inputs, the principal, the annual rate in percent and the time in years, and applies one multiplication:
interest = principal × rate × years / 100 and total = principal + interest
Because nothing compounds, the interest grows by the same amount every year, so a plot of the balance over time is a straight line. Time can be fractional, so 18 months is entered as 1.5. Both outputs are rounded to whole numbers for display.
Worked example
Lend 10,000 at 6% for 5 years. The interest is 10,000 × 6 × 5 / 100 = 3,000, so the total is 13,000. Each year adds exactly 600. If the same 10,000 compounded annually at 6%, the balance after 5 years would be 13,382, and the gap widens with time.
Simple versus compound over longer periods
| 10,000 at 8% | Simple total | Compounded annually |
|---|---|---|
| 5 years | 14,000 | 14,693 |
| 10 years | 18,000 | 21,589 |
| 20 years | 26,000 | 46,610 |
Over a single year the two methods give the same answer. The difference only appears from year two onwards, which is why short-term products are often quoted on a simple basis and long-term ones on a compound basis.
Where simple interest is used, and where it is not
- Common uses. Short personal loans between individuals, some bonds that pay a fixed coupon on face value, certain car loans and many school-maths problems. Check your own agreement, since lenders in different countries describe loans differently.
- Not an instalment loan. The number here is the interest on a lump sum held for the full period. If you repay a loan in monthly instalments, the balance falls over time and the interest is lower; use the loan calculator for that.
- Rate units. The rate must be per year. A 1.5% monthly rate is 18% a year, so type 18, not 1.5.
- Days instead of years. To work out interest for 90 days, enter 90 / 365, which is about 0.2466, as the time. Some lenders use a 360-day year, which changes the result slightly.
To see the compounding effect on your own numbers, the compound interest calculator uses the same inputs plus a compounding frequency. The guide on compound interest explained covers why the curves diverge.