Total Amount (Principal + Interest)
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I = P × r × t
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Principal
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Interest Earned
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Daily Interest
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Monthly Interest
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End Date
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Total Days
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Compound Interest Comparison (monthly compounding)
Simple interest total
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Compound interest total
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Extra earned with compounding
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What Is Simple Interest?
Simple interest is calculated only on the original principal — it never earns interest on previously accumulated interest. It's the most straightforward form of interest calculation and is commonly used for short-term loans, car loans, personal loans, and some savings products.
The Simple Interest Formula
I = P × r × t
I = Interest earned |
P = Principal |
r = Annual interest rate (as a decimal) |
t = Time in years
The total amount at the end of the period is: A = P + I = P(1 + rt)
Simple Interest vs Compound Interest
The key difference: with simple interest, the interest amount is the same every period. With compound interest, interest is added to the principal, so each subsequent period earns more interest than the last. Over long periods, the difference is dramatic.
Example on $10,000 at 5% for 10 years:
- Simple interest: $5,000 in interest → total of $15,000
- Compound interest (monthly): $6,470 in interest → total of $16,470
The compound interest earns $1,470 more — and the gap widens significantly over longer time horizons.
When Is Simple Interest Used?
- Auto loans — most car loans use simple interest, calculated on the remaining principal balance each day
- Short-term personal loans — payday loans and some personal loans use simple interest
- US Treasury Bills — short-term government securities use simple interest
- Student loans — federal student loans accrue simple interest while in school and during deferment
- Mortgages — while calculated daily on remaining principal, the effective result is similar to simple interest on the outstanding balance
Frequently Asked Questions
How do I calculate simple interest manually?
Use the formula I = P × r × t. For example, $5,000 at 6% for 3 years: I = 5,000 × 0.06 × 3 = $900 in interest. Total amount = $5,000 + $900 = $5,900. Remember to convert the rate to a decimal (divide by 100) and the time to years (divide months by 12, or days by 365).
Is simple interest better for borrowers or lenders?
Simple interest is generally better for borrowers and worse for lenders/investors compared to compound interest. As a borrower, you pay less total interest because the interest doesn't compound on itself. As a saver or investor, compound interest is preferable because your earnings grow exponentially over time. This is why banks offer compound interest on savings accounts but often use daily simple interest on auto loans.
What is the Rule of 72 for simple interest?
For simple interest, the time to double your money is simply 100 ÷ rate. At 5%, it takes 20 years to double with simple interest (100 ÷ 5 = 20). The Rule of 72 applies to compound interest — at 5% compound interest, money doubles in roughly 14.4 years (72 ÷ 5). This illustrates how much more powerful compounding is for long-term growth.
Do auto loans use simple or compound interest?
Most auto loans in the US use simple interest, accrued daily on the outstanding principal balance. This means making payments early (or paying more than the minimum) directly reduces the principal and saves you interest. Conversely, paying late increases the amount of interest accrued before your payment is applied. Always pay on time or early on a simple interest loan to minimize costs.