💸 Simple Interest Calculator
Calculate interest earned or paid based only on the initial principal amount.
Understanding Simple Interest
Simple interest is a basic way to calculate the interest charge on a loan or deposit. It's calculated only on the original principal amount and does not include interest earned in previous periods (unlike compound interest).
The Formula for Simple Interest:
Simple Interest (I) = Principal (P) × Rate (R) × Time (T)
- Principal (P): This is the initial sum of money you borrow, lend, or invest. For example, if you deposit $1,000 into a savings account, $1,000 is the principal.
- Rate (R): This is the annual interest rate. It's crucial to convert the percentage to a decimal for calculations (e.g., an annual rate of 5% becomes 0.05).
- Time (T): This is the duration for which the money is borrowed or invested, typically expressed in years. If the time is given in months, you'll need to convert it to years (e.g., 6 months = 0.5 years).
The Final Amount (A) is calculated as: A = P + I
Example:
If you invest $1,000 (P) at an annual interest rate of 5% (R = 0.05) for 3 years (T), the simple interest earned would be:
I = $1,000 × 0.05 × 3 = $150
The total amount after 3 years would be:
A = $1,000 + $150 = $1,150
When is Simple Interest Used?
- Commonly applied to short-term loans, such as payday loans, some auto loans (especially for the initial calculation period), or short-term personal loans.
- Certain types of basic savings accounts or certificates of deposit (CDs) might use simple interest, though compound interest is far more prevalent for investments and long-term savings to maximize growth.
Simple vs. Compound Interest:
The primary distinction lies in how interest is calculated. Simple interest is always based on the original principal amount. In contrast, compound interest is calculated on the principal amount and also on the accumulated interest from previous periods. This "interest on interest" effect means that compound interest typically leads to significantly faster growth of savings or investments over the long term compared to simple interest.