Simple Interest Calculator
Calculate the interest earned on an investment or loan using simple interest.
What is Simple Interest?
Simple interest is a method of calculating interest where interest is only applied to the original principal amount. Unlike compound interest, simple interest does not earn interest on previously earned interest.
Key Concept:
Simple interest grows linearly over time, making it easier to calculate and predict. It's commonly used for short-term loans, bonds, and some savings accounts.
Calculator
Results
Total Amount
After 5 years
Interest Earned
Visual Comparison
Simple vs. Compound Interest
Simple Interest
- Interest calculated only on the principal amount
- Grows linearly over time
- Easier to calculate and understand
- Typically used for short-term loans and basic savings
- Formula: I = P × r × t
Compound Interest
- Interest calculated on principal and accumulated interest
- Grows exponentially over time
- More complex to calculate
- Used for most investments and long-term savings
- Formula: A = P(1 + r)^t
How It Works
The Simple Interest Calculator uses the following formula:
I = P × r × t
Where:
- I = Interest
- P = Principal amount (initial investment or loan)
- r = Annual interest rate (as a decimal or percentage)
- t = Time period in years
How to Calculate Interest:
To calculate simple interest, multiply the principal by the interest rate (as a decimal or percentage) and the time period in years. For example, a $1,000 loan at 5% interest for 3 years would earn $150 in interest (1000 × 0.05 × 3 = 150).
The total amount after the specified time period is calculated by adding the principal to the interest: A = P + I
Simple interest is calculated only on the principal amount, unlike compound interest which is calculated on the principal and the accumulated interest of previous periods.
How to Use
- Enter the principal amount (initial investment or loan amount) in the "Principal Amount" field.
- Input the annual interest rate as a percentage.
- Specify the time period in years.
- The calculator will automatically update the results and graph based on your inputs.
- Review the total amount and interest earned. The chart shows how the investment grows linearly over time with simple interest.
- Compare different scenarios by adjusting the principal, interest rate, or time period to see how they affect the results.
Frequently Asked Questions
Comprehensive Guide
Understanding Interest in Financial Terms
Interest as a Cost
When borrowing money, interest is the cost you pay for using someone else's money. It's essentially the "rent" paid on borrowed funds. Lenders charge interest to compensate for the risk they take by lending money and to account for the time value of money (the principle that money available now is worth more than the same amount in the future).
Interest as a Reward
When saving or investing, interest is the reward you receive for allowing others to use your money. Banks pay interest on deposits because they use that money to make loans. Companies pay interest on bonds because they're using your money to fund operations or expansion. Interest compensates you for delaying your own consumption and for the risk that you might not get your money back.
The Different Meanings of Interest
The term "interest" has several meanings in finance and economics:
- Financial interest: The cost of borrowing money or the return on saving/investing money, expressed as a percentage.
- Ownership interest: A legal share or right in property or assets, such as having an "interest" in a business.
- Economic interest: The benefit or advantage that someone stands to gain from a particular situation or transaction.
- Compound interest: Interest calculated on both the initial principal and the accumulated interest from previous periods.
- Simple interest: Interest calculated only on the principal amount.
Synonyms for Interest:
In financial contexts, synonyms for interest include: return, yield, dividend, profit, earnings, gain, proceeds, revenue, or income. When referring to loans, terms like finance charge, APR, or cost of borrowing are often used.
How Interest Rates Are Determined
Interest rates are influenced by several factors:
- Central bank policies: The Bank of England, Federal Reserve, and other central banks set base rates that influence all other interest rates in the economy.
- Inflation: Higher inflation typically leads to higher interest rates, as lenders want to ensure their returns exceed inflation.
- Economic growth: Strong economic growth often leads to higher interest rates as demand for loans increases.
- Risk: Riskier loans command higher interest rates to compensate lenders for the increased chance of default.
- Term length: Longer-term loans or investments typically have higher interest rates due to increased uncertainty over longer periods.
- Supply and demand for credit: When more people want to borrow than there is money available to lend, interest rates tend to rise.
Real vs. Nominal Interest Rates:
The nominal interest rate is the stated rate on a loan or investment. The real interest rate is the nominal rate minus inflation, representing the actual increase in purchasing power. For example, if a savings account pays 3% interest during 2% inflation, the real interest rate is only 1%.
Practical Applications of Simple Interest
Simple interest is commonly used in various financial situations:
- Short-term loans: Many personal loans, auto loans, and short-term business loans use simple interest.
- Bonds: Some bonds pay simple interest in the form of regular coupon payments based on the face value.
- Treasury bills: These short-term government securities often use simple interest calculations.
- Legal judgments: Courts often award simple interest on monetary judgments.
- Some savings accounts: Basic savings accounts may use simple interest, especially for short-term deposits.
- Mortgage prepayment penalties: These are often calculated using simple interest.
Example:
If you borrow $10,000 at 6% simple interest for 3 years, you'll pay $1,800 in interest ($10,000 × 0.06 × 3), making your total repayment $11,800. With simple interest, you pay the same interest amount each year ($600), regardless of how much of the principal you've repaid.
Comparison Tables
Interest Rate Comparison
| Interest Rate (%) | Interest Earned | Total Amount | Percentage Gain |
|---|---|---|---|
| 1% | $50.00 | $1050.00 | 5.00% |
| 2% | $100.00 | $1100.00 | 10.00% |
| 3% | $150.00 | $1150.00 | 15.00% |
| 4% | $200.00 | $1200.00 | 20.00% |
| 5% | $250.00 | $1250.00 | 25.00% |
| 7% | $350.00 | $1350.00 | 35.00% |
| 10% | $500.00 | $1500.00 | 50.00% |
Based on $1000 principal for 5 years
Simple vs. Compound Interest Comparison
| Feature | Simple Interest | Compound Interest |
|---|---|---|
| Calculation Base | Principal only | Principal + accumulated interest |
| Growth Pattern | Linear | Exponential |
| Formula | I = P × r × t | A = P(1 + r)^t |
| Common Uses | Short-term loans, bonds | Investments, savings accounts, mortgages |
| Calculation Complexity | Simple | More complex |
| Long-term Effect | Less powerful | More powerful |
Common Financial Products Using Simple Interest
| Financial Product | Typical Interest Rates | Interest Calculation | Key Features |
|---|---|---|---|
| Treasury Bills | 1% - 5% | Simple interest | Short-term government securities, highly secure |
| Auto Loans | 3% - 10% | Simple interest (often) | Secured by the vehicle, fixed term |
| Personal Loans | 6% - 36% | Simple interest (sometimes) | Unsecured, fixed repayment schedule |
| Some Bonds | 2% - 8% | Simple interest on coupon payments | Regular interest payments based on face value |
| Legal Judgments | Varies by jurisdiction | Simple interest | Interest on court-awarded damages |
| Some Savings Accounts | 0.1% - 2% | Simple interest (sometimes) | Basic accounts with minimal features |
Note: Interest rates vary based on economic conditions, creditworthiness, and other factors. The rates shown are approximate ranges.