What is simple interest?
Simple interest is calculated only on the original principal. Unlike compound interest, previously earned interest is not added to the balance for future interest calculations.
The simple interest formula
The basic formula is I = P × r × t, where I is interest, P is principal, r is the annual rate written as a decimal, and t is time in years.
Worked example
Suppose the principal is $5,000, the annual rate is 6%, and the term is 3 years. Convert 6% to 0.06, then calculate 5,000 × 0.06 × 3 = 900. The interest is $900 and the final balance is $5,900.
When simple interest is useful
The formula is commonly used for quick estimates and for products whose terms explicitly use simple interest. Always check the lender, account or contract method because fees, day-count rules and payment schedules can change the real amount.
Try different values with the Simple Interest Calculator.