Simple Interest Calculator

A simple interest calculator is a tool that calculates the amount of interest accrued on loans or deposits based on principal amount, rate of interest and time period. The interest is calculated only on the original amount and not on any previously added interests. Hence it is easy to understand and is commonly used for car loans, personal loans and many short term loans.

Enter three of the four values and leave the fourth field blank. The calculator will then fill in the blank field to find interest, principal amount, rate or time period. Additional options allow for comparing results with compound interest calculations, splitting a loan into monthly installments or deducting taxes from interest.

What is simple interest?

Simple interest is a type of loan where the interest is always calculated on the original remaining balance. The principal amount is the amount borrowed or invested. The interest rate is the annual fee charged by the lender and expressed as a percentage. The term length is the period over which the money will be used.

Because interest is not added to the principal amount, the amount that increases each year stays the same. If you borrow $1,000 and the interest rate is 5 percent, then the annual interest is $50. This does not change whether it's for one or ten years. With compound interest, however, the interest earned in each period is added back to the principal amount so that subsequent interest is calculated on a growing balance.

Here's how to use this calculator.

Start with three known values: the principal, annual interest rate and term length. The calculator will show you both the simple interest and total amount repaid or earned.

If you want to work backwards, leave the field blank for the value that you want to find out. If you leave the interest rate blank, you can figure out what rate of interest is required to get the desired amount from the principal. If you leave the term blank, you can calculate how long it will take to achieve this result. This is just another perspective on the same relationship and the mathematical relationship remains unchanged.

The formula for calculating simple interest is:

Simple interest is calculated by multiplying the principal amount by the annual rate of interest and the time period that has elapsed in years.

To find the total amount that will be repaid or received at the end of the term, you add the interest to the principal. This is sometimes referred to as the future value of a simple-interest loan.

By re-arranging this relationship, all other cases can be calculated. The following formulas find a missing value given the three known values.

The table lists individual symbols and example values.

Calculate simple interest monthly or daily.

Since interest rates are usually quoted on an annual basis, time periods that are given in months or days must first be converted to years. To do this for calculations involving months, divide the number of months by twelve. For calculations involving days, divide the number of days by the number of days in a year, normally 365.

If you change the term field to monthly, then you can directly input loans with a term of less than one year. A loan with a six-month term is 0.5 years, which means that the interest generated from the same amount will be half as much as it would in one year.

Example calculation:

Suppose you lend a friend $10,000 at an interest rate of 6 percent for one year.

The interest is $600 so the total your friend will have to pay back is $10,600. If you spread that same loan out over three years then the interest would be $1,800. This is because it goes up by $600 each year. A common question is: What's the interest on a $30,000 loan at 6 percent? The calculation method is the same: If you multiply .06 by $30,000 then you get $1,800 per year.

Comparison of simple and compound interest

Simple and compound interest use the same inputs but over time their calculations diverge. Simple interest increases the amount by a constant value each compounding period. Compound interest adds the interest to the remaining balance and calculates the interest for the next period based on that higher remaining balance, which leads to faster growth.

If you are calculating an annual interest rate, both methods will be identical if the time period is one year. The longer the time period or the more often interest is compounded within a year, the greater the difference between the two methods. If you open the compound interest calculator, you can compare both methods side by side, along with the extra interest earned from compounding. This is why many banks use compound interest for savings and mortgage loans. On the other hand, simple interest is often more beneficial to the borrower when it comes to short-term debts.

Applications of simple interest

Simple interest is often used for car loans and other auto financing, many personal loans and short-term loans, some bonds and certificates of deposit with fixed coupon payments. It also comes up in everyday estimates, such as when calculating the interest on a peer-to-peer loan or estimating the approximate amount of a bridge loan. If you're only accruing interest on the principal amount, then this is the calculation to use.

Tips for more realistic results:

Use the same time unit for interest rate and term. If the interest rate is stated annually, leave the term in years or convert months or days as described above. Check whether or not there are compound interests before comparing loan offers. This is important because even with the same nominal interest rate, the total cost can be different. For terms longer than one year, you should check the results of calculations with compound interest to ensure that the costs are not underestimated.