How to Use Our Simple Interest Calculator
To find the total simple interest, you only need three key pieces of information.
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Principal Amount ($): This is the initial amount of the loan or deposit. For a car loan, it’s the total amount you are borrowing. For savings, it’s your starting deposit.
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Annual Interest Rate (%): Enter the yearly interest rate for the loan or investment. If you are quoted a monthly rate, multiply it by 12 to get the annual rate.
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Time Period: The duration for which the money is borrowed or invested. You can enter this in years, months, or days, and our calculator will handle the conversion.
Understanding Your Results
After you input your numbers, the calculator will provide two key results based on the simple interest formula: Interest = Principal × Rate × Time or I = P × R × T.
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Total Interest: This is the total dollar amount of interest that will be paid or earned over the time period you specified. It is a fixed amount calculated solely on the initial principal.
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Total Principal + Interest: This is the final amount you will have paid back on a loan or the total value of your savings at the end of the term. It’s the sum of the original principal and the total interest accrued.
Simple Interest Calculation Example
Let’s say you take out a $10,000 car loan with a 7% annual interest rate over a period of 5 years.
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Principal (P): $10,000
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Rate (R): 7% or 0.07
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Time (T): 5 years
The calculation would be: Interest = $10,000 × 0.07 × 5 = $3,500
This means over 5 years, you would pay a total of $3,500 in interest on your $10,000 loan.
Frequently Asked Questions
What is simple interest typically used for?
Simple interest is most commonly used for shorter-term loans where the interest calculation is kept straightforward. You will most often encounter it with:
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Auto Loans: Most car loans are calculated using simple interest. Your monthly payment consists of a portion of the principal and the interest accrued for that month.
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Short-Term Personal Loans: Many shorter-term loans from banks or credit unions use this method.
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Certificates of Deposit (CDs): While some CDs compound, many pay out simple interest annually or at maturity.
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Promissory Notes: Simple IOUs between individuals or businesses often use simple interest.
It is generally not used for long-term investments like retirement accounts or high-yield savings accounts, which benefit from the power of compounding.
What is the main difference between simple and compound interest?
The key difference is how the interest is calculated. Simple interest is only calculated on the original principal amount. Compound interest is calculated on the principal and on the accumulated interest from previous periods (“interest on your interest”).
This leads to a massive difference in outcomes over time.
Concrete Example: You invest $5,000 for 10 years at a 6% annual rate.
As you can see, compounding resulted in nearly $1,000 more in earnings over the decade. For an investor, compound interest is far more powerful. For a borrower, simple interest is generally more favorable.
How do I use the simple interest formula if the time isn’t in years?
The standard I = P × R × T formula assumes that the rate (R) is annual and the time (T) is in years. If your time period is in months or days, you must convert it to a fraction of a year before using the formula.
Our calculator does this conversion for you automatically when you select months or days.
What is Annual Percentage Rate (APR) on a simple interest loan?
For a simple interest loan without any fees, the Annual Percentage Rate (APR) is the same as the annual interest rate. However, APR is a broader measure that includes not just the interest rate but also any lender fees, such as origination fees or closing costs, expressed as an annual percentage.
Therefore, the APR gives you a more complete picture of the cost of borrowing. When comparing loan offers, always compare the APR, not just the interest rate.
Is simple interest good or bad?
It depends on your perspective:
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For a Borrower: Simple interest is generally good. Your interest charges are predictable and do not grow exponentially. Because you are not paying interest on top of previously accrued interest, the total cost of borrowing is lower compared to a compound interest loan with the same rate.
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For an Investor/Saver: Simple interest is generally bad (or at least, not optimal). It severely limits the growth potential of your money because you miss out on the accelerating returns from compounding. For any long-term savings or investment goal, you should seek accounts that offer compound interest.
Next Steps in Your Financial Journey
Now that you understand simple interest, see how much faster money can grow with our Compound Interest Calculator. If you are planning for a specific loan, like for a vehicle, use our Car Loan Calculator to estimate your monthly payments, which often use simple interest.
