What simple interest is
Simple interest is the most straightforward way to work out the cost of a loan or the return on savings: interest is always calculated on the original principal and never on the interest already earned. That means the amount added each period stays the same. Lend 10,000 at 12% a year and it earns exactly 1,200 in interest every year, whether the term runs for three years, five, or ten.
That is the key difference from compound interest. With compounding, each period’s interest is added to the balance and earns interest of its own in the next period (interest on interest), so the base grows and the total accelerates over time. With simple interest the base never moves. This is why simple interest is usually cheaper for the borrower and more predictable for the saver.
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How to use the calculator
- Principal: the amount the interest is calculated on (the loan or the starting savings).
- Annual interest rate: the yearly percentage charged by the bank, lender, or savings product.
- Time: how long the loan or investment lasts. Use the selector to choose years or months.
- Read the results: the interest earned, the total amount to pay or receive, and the interest per year.
- Open the breakdown to see, period by period, how the interest builds up.
The formula
Simple interest comes down to one formula:
I = P · r · t
where P is the principal, r is the annual rate as a decimal (12% is written 0.12), and t is the time in years. The total is simply Total = P + I. When the term is given in months, convert it to years first by dividing by 12.
Worked example
Suppose you invest 10,000 at 12% a year for 3 years:
- Interest: 10,000 × 0.12 × 3 = 3,600
- Total amount: 10,000 + 3,600 = 13,600
- Interest per year: 10,000 × 0.12 = 1,200
Each of the three years contributes the same 1,200 in interest, in any order. That flat, repeating amount is the signature of simple interest.
Quick reference table
Interest earned on a principal of 10,000 by rate and term:
| Annual rate | 1 year | 2 years | 3 years |
|---|---|---|---|
| 8% | 800 | 1,600 | 2,400 |
| 10% | 1,000 | 2,000 | 3,000 |
| 12% | 1,200 | 2,400 | 3,600 |
| 15% | 1,500 | 3,000 | 4,500 |
When simple interest is used
It shows up mostly in short-term deals: personal loans of a few months, fixed-schedule car financing, promissory notes, and some certificates of deposit that pay interest at maturity without reinvesting it. It is also the basis for late fees calculated day by day.
Frequently asked questions
What’s the difference between simple and compound interest?
Simple interest is calculated only on the principal; compound interest is calculated on the principal plus accrued interest. On 10,000 at 12% for 3 years, simple interest is 3,600 (total 13,600). With annual compounding, the interest rises to 4,049.28 (total 14,049.28). That 449.28 gap widens the longer the term runs.
How do I convert months to years?
Divide the months by 12. So 18 months equals 1.5 years and 9 months equals 0.75 years. This calculator does the conversion for you when you pick “Months” in the selector.
Do personal loans use simple or compound interest?
It depends on the product. Many fixed-installment loans are quoted as simple interest on the balance, but if you miss payments and the interest capitalizes, the cost starts to behave like compound interest. Always check the contract and the effective rate before signing.
Does the result include taxes or fees?
No. The calculator shows the gross interest from the formula. Commissions, insurance, administrative charges, and taxes on interest are added separately and vary by institution.