The Quick Answer
Simple interest is interest calculated only on the original amount you deposit or borrow. The formula is:
I = P × r × t
Where P is the principal (starting amount), r is the annual interest rate as a decimal, and t is the time in years. The total amount you end up with is A = P + I.
Example: $10,000 at 5% for 3 years earns $1,500 in interest, for a total of $11,500.
Use the simple interest calculator to compute your own values instantly.
The Formula Step by Step
Let's walk through a complete calculation.
Problem: You lend a friend $5,000 at 6% annual simple interest for 2 years. How much interest do they owe?
- Identify the values: P = $5,000, r = 6% = 0.06, t = 2
- Plug into the formula: I = 5,000 × 0.06 × 2
- Calculate: I = $600
- Total owed: A = 5,000 + 600 = $5,600
The interest is $300 per year, every year — it doesn't change because simple interest is always based on the original principal.
Calculating for Months and Days
The formula uses years, so convert shorter periods to fractions.
Months
Divide the number of months by 12.
Example: $8,000 at 4% for 9 months.
- t = 9 / 12 = 0.75 years
- I = 8,000 × 0.04 × 0.75 = $240
Days
Divide the number of days by 365. Some banks use 360 (the "banker's year" convention), which produces slightly higher interest.
Example: $2,000 at 8% for 90 days.
Using 365-day year:
- t = 90 / 365 ≈ 0.2466
- I = 2,000 × 0.08 × 0.2466 = $39.45
Using 360-day year:
- t = 90 / 360 = 0.25
- I = 2,000 × 0.08 × 0.25 = $40.00
The difference is small but adds up on large principals. If the terms don't specify, 365 days is the most common standard.
Rearranging the Formula
You can solve for any of the four variables:
| Find | Formula | Practical use |
|---|---|---|
| Interest (I) | I = P × r × t | "How much interest will I earn?" |
| Principal (P) | P = I / (r × t) | "How much did I originally deposit?" |
| Rate (r) | r = I / (P × t) | "What interest rate am I getting?" |
| Time (t) | t = I / (P × r) | "How long until I earn $X in interest?" |
Example — finding the rate: You earned $750 on a $10,000 deposit over 3 years. What rate were you getting?
r = 750 / (10,000 × 3) = 0.025 = 2.5%
When Simple Interest Is Used
Simple interest is not a relic — it's actively used in several real-world contexts:
- Auto loans — many car financing arrangements calculate interest on the original balance
- Short-term personal loans — installment loans with fixed interest amounts
- U.S. Treasury bonds — pay a fixed coupon based on face value
- Trade credit — net-30/60/90 payment terms where interest accrues on overdue invoices
- Student loans in deferment — federal student loans accrue simple interest while in grace periods
- Certificates of deposit — some CDs calculate interest using simple interest (check the terms)
If the lender or institution says "simple interest," it means they are using I = P × r × t — not compounding.
Simple Interest vs. Compound Interest
The key difference: with simple interest, each year earns the same dollar amount. With compound interest, each period earns more because prior interest gets added to the base.
$10,000 at 5% for 10 years:
| Year | Simple Interest Balance | Compound Interest Balance (annual) |
|---|---|---|
| 0 | $10,000 | $10,000 |
| 1 | $10,500 | $10,500 |
| 2 | $11,000 | $11,025 |
| 3 | $11,500 | $11,576 |
| 5 | $12,500 | $12,763 |
| 10 | $15,000 | $16,289 |
After 10 years, compound interest produces $1,289 more. Over 30 years, the gap widens dramatically: simple interest gives $25,000 while annual compound interest gives $43,219.
For a detailed breakdown of compound interest, see How Compound Interest Works.
Five Common Mistakes
1. Forgetting to convert the percentage
5% must become 0.05 in the formula. Using "5" instead of "0.05" gives a result that's 100 times too large. This is the single most common calculation error.
2. Mixing time units
If the rate is annual, the time must be in years. Entering "6" for 6 months instead of "0.5" gives 12× the correct interest.
3. Assuming all interest is simple
Credit cards, mortgages, and most savings accounts use compound interest. The term "interest rate" alone doesn't tell you which type. Look for "simple interest" explicitly in the loan terms.
4. Ignoring the day-count convention
In banking, the year length used for daily calculations varies. A 360-day year (30/360 convention) produces slightly more interest than a 365-day year (actual/365). On a $100,000 loan at 6%, the difference over 90 days is $16.44.
5. Confusing interest rate with APR
APR (Annual Percentage Rate) can include fees and other costs, making it higher than the simple interest rate. The simple interest formula uses the nominal rate only, not APR.
Worked Examples
Example 1: Savings deposit
You put $15,000 in a simple-interest CD at 4.2% for 18 months.
- t = 18 / 12 = 1.5 years
- I = 15,000 × 0.042 × 1.5 = $945.00
- Total at maturity: $15,945.00
Example 2: Finding how long to earn a target
You want to earn $1,000 in interest on $20,000 at 3%. How long does it take?
- t = I / (P × r) = 1,000 / (20,000 × 0.03)
- t = 1,000 / 600 = 1.667 years (about 1 year and 8 months)
Example 3: Comparing two offers
Offer A: $10,000 at 5% simple interest for 2 years. Offer B: $10,000 at 4.8% simple interest for 2.5 years.
- Offer A: I = 10,000 × 0.05 × 2 = $1,000
- Offer B: I = 10,000 × 0.048 × 2.5 = $1,200
Offer B earns $200 more, but your money is locked up 6 months longer. Which is better depends on whether you need the liquidity.
Limitations of This Calculator
- It assumes a fixed rate for the entire period — rates don't change mid-term
- It does not include fees, taxes, or other costs
- It does not adjust for inflation
- It calculates using a 365-day year unless you adjust manually
For compound interest scenarios, use the compound interest calculator. For loan payment schedules with amortization, see the loan amortization schedule.
Try It Yourself
Plug your own numbers into the simple interest calculator to see the interest earned, total amount, and year-by-year breakdown. Switch between years, months, and days with one click.