Finance
Simple Interest Calculator: The Basics
Learn how simple interest works, when it is used, and how to calculate it.
Simple interest is calculated only on the original principal.
Formula
I = P × r × t. Principal times rate times time.
When Used
- Short-term loans: Transparent
- Auto loans: Most car loans
- Student loans: Some federal
- Bonds: Regular payments
Simple vs Compound
Simple stays constant. Compound grows. Over decades, compound produces significantly more.
Example
$10,000 at 5% for 3 years: I = $1,500. Total = $11,500.
Frequently Asked Questions
When is simple better?
For borrowers on short-term loans. For investors, compound generates more.
Do banks use simple?
Savings use compound. Some short-term loans use simple.
Monthly calculation?
I = P × (r/12) × months.