How this works
Simple interest is the easy version: interest is paid only on the original principal, never on interest already earned. That makes it predictable — your annual interest is the same every year, and the total grows in a straight line. Use it for short-term loans, savings bonds with fixed payouts, and any deal that explicitly says "simple interest" rather than "compound".
The formula
P = principal (starting amount). r = annual rate as a decimal (5% → 0.05). t = time in years. I = total interest earned. The formula works for fractional years too — six months is t = 0.5.
Example calculation
- You deposit $10,000 in a 3-year savings bond paying 5% simple interest annually.
- Annual interest: 10,000 × 0.05 = $500. Same every year — no compounding.
- Total interest after 3 years: 500 × 3 = $1,500. Final balance: $11,500.
Frequently asked questions
What's the difference between simple and compound interest?
Simple interest is calculated only on the original principal, so the annual amount never changes. Compound interest is calculated on principal plus accumulated interest, so the balance grows faster each year. Over 30 years at 7%, $10k becomes $31k with simple interest but $76k with annual compounding.
When is simple interest actually used?
Auto loans, short-term personal loans, some bonds, and most mortgages quote simple interest on the unpaid balance — though the daily-balance recalculation makes them feel like compound interest in practice. Long-term savings and credit-card balances almost always compound.
Can I use this for a partial year?
Yes — enter time as a decimal. Six months is 0.5 years, three months is 0.25, 90 days is roughly 0.247 (90/365). Make sure your interest rate is annual to match.
Is the rate I see on a loan offer always 'simple'?
Not always. The advertised "interest rate" is usually the nominal annual rate, but the APR (annual percentage rate) folds in fees and compounding. For an apples-to-apples comparison, look at the APR — and if it differs from the nominal rate by more than a small amount, the loan is effectively compounding.