Simple Interest Calculator
Calculate simple interest earned or owed. Compare with compound interest to see the difference.
I = P × R × T
Interest Calculation
$1,500
Simple Interest Earned
$10,000
Principal
$11,500
Total (P + I)
$1,576
Compound Interest
$76
Compound Advantage
Simple interest over 3.00 years: $1,500. Compounding annually would earn $1,576 — $76 more.
Analysis & insights
On $10,000 at 5% for 3.00 years, simple interest earns $1,500 — total $11,500. Compare to compound interest which earns $1,576 — total $11,576. Compounding adds $76 more over the same period. Always pick compound over simple when investing; understand the difference when borrowing.
Simple interest calculation
Simple interest grows linearly. Compound interest grows exponentially. The longer the period, the bigger the gap.
Risk & benchmark gauge
Current band
Moderate
5% annual rate
Industry benchmarks
- Simple interest earned$1,500
- Simple total$11,500
- Compound interest$1,576
- Compound total$11,576
- Compound advantage$76
Key insights
Where simple interest actually shows up
Auto loans, personal loans, and some short-term promotional bonds use simple interest. Most everything else (savings, mortgages, credit cards) compounds.
Compound interest is most powerful at long horizons
At year 1, simple ≈ compound. At year 30, compound at 7% earns ~3x simple at the same rate. Time multiplies the gap.
Credit cards compound DAILY
Credit card interest compounds every day on your unpaid balance. That's why a $5,000 balance at 22% APR can grow to $7,000 in a year if untouched.
Recommended actions(2)
For loans, ASK about simple vs compound
High prioritySimple-interest loans are usually consumer-friendly. Compound (especially daily compound) costs more. Verify before signing.
For savings, prefer DAILY compounding
Medium priorityMost modern high-yield savings accounts compound daily. The difference vs monthly is small ($1-5 per $10K/year) but free.
Related Calculators
This tool is for educational purposes only and does not constitute financial, tax, or investment advice. Consult a qualified financial professional for advice specific to your situation.
What is Simple Interest?
Simple interest is charged on the original principal only. Borrow $10,000 at 5% and you owe $500 a year, every year, regardless of how long the loan runs. The interest never earns interest of its own.
That single property is what separates it from compound interest, and over long periods the gap is enormous. Over thirty years at 5%, simple interest on $10,000 comes to $15,000 while annual compounding produces $33,219 — more than twice as much.
Simple interest is the minority case in modern finance. It survives in car loans, most personal loans, some short-term commercial lending, and the way many bonds pay their coupons. Almost everything else compounds.
Knowing which one applies to a given debt is worth more than any amount of rate-shopping, because it changes what the rate actually costs you.
The formula — how to calculate Simple Interest
- P
- = principal — the original amount, which never changes
- R
- = annual rate as a decimal, so 5% is 0.05
- T
- = time in years; a fraction for anything shorter
The formula is linear in all three variables. Double the time and you double the interest — which is exactly what compound interest does not do.
Step-by-step example
- 01$10,000 at 5% for 3 years.
- 02I = 10,000 × 0.05 × 3 = $1,500. Total repayable: $11,500.
- 03The same money compounded annually: 10,000 × 1.05³ = $11,576.25, so $1,576.25 of interest — $76.25 more.
- 04Over three years the difference is small. Push it to thirty and simple interest gives $15,000 while annual compounding gives $33,219, a difference of $18,219 on the same principal and the same rate.
- 05Now the case that surprises people. Six months at 5%: simple interest is 10,000 × 0.05 × 0.5 = $250. Annual compounding over the same half year is 10,000 × (1.05^0.5 − 1) = $246.95.
- 06Compound interest is $3.05 LESS. Over a term shorter than one compounding period, simple interest pays more, because the compounding has not yet had a full period in which to happen.
Where each one applies
Simple or compound in practice
| Product | Which | Note |
|---|---|---|
| Car loans | Simple | Interest accrues daily on the outstanding balance; paying early genuinely reduces it |
| Most personal loans | Simple | Fixed instalments; the interest portion falls as the balance does |
| Mortgages | Simple, amortised | Interest is charged on the remaining balance each month, not compounded onto it |
| Credit cards | Compound | Unpaid interest is added to the balance and then charged interest — daily in most cases |
| Savings accounts | Compound | Usually daily or monthly, which is what makes APY exceed the stated rate |
| Bonds | Simple coupons | The coupon is paid out rather than reinvested, unless you reinvest it yourself |
| Certificates of deposit | Compound | Frequency varies and is worth checking against the APY |
The distinction that matters for a borrower is whether unpaid interest gets added to the principal. That is the mechanism behind credit card debt growing faster than people expect.
Amortised is not the same as compound
A mortgage charges simple interest on the outstanding balance each month. It feels like compounding because you pay so much interest early on, but that is amortisation — the balance is large at the start, so the interest on it is large. Nothing is being charged interest on interest, which is why paying extra principal reduces total interest so effectively.
Day-count conventions, and why 360 is not a typo
For anything measured in days, the answer depends on what the lender counts as a year, and there is more than one answer in common use.
A 365-day basis, sometimes written actual/365, is what most consumer lending uses and what most people assume.
A 360-day basis — the "banker's year" — divides the annual rate by 360 rather than 365, which makes each day worth slightly more interest. It dates from an era of hand calculation, when a year of twelve 30-day months was simply easier to work with, and it survives in commercial lending and money markets.
The effect is a 1.39% increase in the effective annual cost: charging 5% on a 360-day basis over a full 365-day year works out at 5.069%. Small on a short loan and real on a large one.
A third convention, 30/360, treats every month as 30 days regardless of the calendar. It is common in corporate bonds and makes coupon periods identical, which simplifies pricing at the cost of slight inaccuracy.
The rule of 72 and its limits
The quickest mental tool in finance: divide 72 by the interest rate to get the number of years for money to double under compounding. At 6%, 72 ÷ 6 = 12 years.
It is accurate to within about a year for rates between roughly 4% and 12%, and drifts outside that band. At 1% the true answer is 69.7 years against the rule's 72; at 25% it is 3.1 against 2.9.
The rule applies only to compounding. Under simple interest, money doubles when the accumulated interest equals the principal, which is at 100 ÷ rate years — 20 years at 5%, against about 14.2 for compounding at the same rate.
Comparing those two numbers is the fastest way to feel the difference the two conventions make.
- APR —
- annual percentage rate — the stated rate plus certain fees, expressed annually. It is what you compare loans on, and it does not necessarily reflect compounding.
- APY —
- annual percentage yield — the effective rate after compounding. On savings, APY is what you actually earn and always equals or exceeds the nominal rate.
- Nominal rate —
- the headline figure before compounding is accounted for. A 5% nominal rate compounded monthly gives an APY of 5.116%.
- Effective rate —
- what the arrangement actually costs or pays once compounding, fees and day-count are all included.
What this means for a borrower
On a simple-interest loan, paying early reduces what you owe in a direct and predictable way. Interest accrues on the outstanding balance, so a payment that reduces the balance reduces every future interest charge.
Two things can undermine that. A prepayment penalty explicitly charges you for paying early. And a small number of older loans use the Rule of 78s, which front-loads interest so that early repayment saves far less than it should — it is prohibited on many loan types and restricted on others, but it is worth checking a contract for.
On any simple-interest loan with daily accrual, paying a few days early genuinely saves a few days of interest. This is not a rounding artefact; on a large balance it is real money over the life of the loan.
The general rule for a borrower: prefer simple interest, and avoid any arrangement where unpaid interest is added to the balance. That mechanism — capitalisation — is what turns a manageable debt into an unmanageable one.
Common mistakes to avoid
- Assuming a loan compounds when it is simple, or the reverse. Check the contract rather than the rate.
- Comparing a nominal rate against an APY. They are different measures and the APY is always the larger.
- Forgetting to convert months or days into years before applying the formula.
- Treating a 360-day basis as equivalent to 365. It raises the effective cost by about 1.4%.
- Expecting compound interest to beat simple interest over a term shorter than one compounding period. It does not.
- Applying the rule of 72 to simple interest, where doubling takes 100 ÷ rate years instead.
Frequently asked questions
Sources & references
Written and fact-checked by the CalcProLabs Editorial Team. Read our calculation methodology and editorial policy.
Last updated