The simple interest formula
Simple interest is charged only on the original principal — it never earns interest on interest. The formula is:
Interest = Principal × Rate × Time
Use the annual rate as a decimal and the time in years. A $10,000 deposit at 5% for 3 years earns 10,000 × 0.05 × 3 = $1,500, bringing the total to $11,500.
Simple vs. compound interest
Because simple interest ignores previously earned interest, it grows in a straight line — the same dollar amount every year. Compound interest grows on the running balance, so it pulls ahead over time. Simple interest is typical for many car loans, short-term personal loans, and certain bonds, while savings accounts and most investments compound.
Converting the time period
- Months: divide by 12 (6 months = 0.5 years).
- Days: divide by 365 (90 days ≈ 0.247 years).
Pick the unit above and the calculator converts it before applying the formula.
Frequently asked questions
How do you calculate simple interest?
Multiply the principal by the annual interest rate (as a decimal) by the time in years: I = P × r × t. For $10,000 at 5% for 3 years, that is 10,000 × 0.05 × 3 = $1,500 in interest, for a total of $11,500.
What is the difference between simple and compound interest?
Simple interest is always calculated on the original principal only, so it grows by the same amount each period. Compound interest is calculated on the principal plus any interest already earned, so it grows faster over time. Simple interest is common for short-term loans, car loans, and some bonds; savings accounts usually compound.
How do I handle a time in months or days?
Convert it to years for the formula: divide months by 12 or days by 365. This calculator does it for you — just pick the time unit. Six months becomes 0.5 years, and 90 days becomes about 0.247 years.
How do I find the rate or principal instead?
Rearrange the formula. The rate is r = I ÷ (P × t), the principal is P = I ÷ (r × t), and the time is t = I ÷ (P × r). If you know any three of principal, rate, time, and interest, you can solve for the fourth.
Disclaimer: This calculator uses simple interest. For accounts that compound, use a compound interest calculator instead. Results are estimates for educational purposes.