Simple Interest Calculator
Simple interest is charged only on the original principal — <em>I = P × r × t</em>. The whole reason to compute it is to see how far it diverges from compound interest, so both are shown together.
The Loan or Deposit
Simple interest never earns interest on interest — that is the entire difference.
Where the gap goes
The formula, and what it leaves out
Simple interest is I = P × r × t. Ten thousand dollars at 6 per cent for five years earns $3,000 — $600 a year, every year, because the interest never joins the principal. Compound interest on the same terms, compounded monthly, earns about $3,489. The $489 difference is the compounding, and it grows superlinearly with time.
Where simple interest actually appears
Most car loans and personal loans in the US are simple-interest loans: interest accrues daily on the outstanding balance and does not capitalise, which is why paying early genuinely reduces total interest. Short-term notes, some bonds between coupon dates, and many legal judgments also use simple interest. Savings accounts, credit cards and mortgages compound.
Why the distinction matters most over long periods
Over one year at ordinary rates the two are nearly identical — the gap above at one year is small. Over thirty years it is enormous. This asymmetry is why compounding feels unremarkable for a while and then seems to accelerate: it was always exponential, and the early part of an exponential curve looks almost straight.
Where simple interest genuinely appears
Simple interest is often presented as a teaching device, but several real instruments use it. Many US auto loans accrue interest daily on the outstanding balance, which means paying a few days early genuinely reduces the interest charged and paying late genuinely increases it, with no prepayment penalty involved. Treasury bills are quoted on a discount basis rather than as a compounding yield, and most bond coupons are simple payments on the face amount rather than reinvested automatically.
The distinction that matters for borrowers is between simple interest and precomputed interest. A precomputed loan fixes the total interest at origination and refunds only a formula-determined portion if you pay it off early, so early payment saves much less than it would on a simple-interest loan of the same rate and term. The loan agreement states which applies, and the difference over the life of a five-year loan paid off in three is substantial.
Frequently Asked Questions
What is the simple interest formula?
What is the difference between simple and compound interest?
Are car loans simple interest?
Which is better for a borrower?
Sources
Official publications only. Links open the original document in a new tab.
- U.S. Securities and Exchange Commission Compound interest — investor glossary Why compounding diverges from simple interest
- Consumer Financial Protection Bureau What is the difference between a mortgage interest rate and an APR? How interest is quoted on consumer loans