Finance
Simple interest calculator
Simple interest is charged only on the original principal. It shows up in short-term notes, some car finance and most bond coupons.
The formula
Total = P × (1 + r × t)
P is the principal, r the annual rate as a decimal, and t the time in years. The whole point is that interest is calculated on P and nothing else. Last year's interest never joins the pile that earns this year's interest.
Because of that, simple interest grows in a straight line. Plot it and you get a slope. Compound interest curves upward, and the gap between the two widens with every year that passes.
Where simple interest is actually used
- Bond coupons. A bond paying 5% on $1,000 pays $50 a year regardless of what you do with the previous coupons.
- Short-term promissory notes and bridging finance, where the term is measured in months and compounding would barely matter.
- Some auto and personal loans, often described as "simple interest loans" — though these usually accrue daily on the outstanding balance, which behaves differently once you start repaying.
- Statutory interest on late payment or court awards, which is very commonly defined as simple by law.
Day-count conventions change the answer
When the term is measured in days, the divisor matters. The 30/360 convention treats every month as 30 days and every year as 360, which is common in bond markets and makes coupon arithmetic clean. Actual/365 and actual/360 use real elapsed days, and actual/360 quietly produces about 1.4% more interest than actual/365 for the same stated rate — a difference that lenders are perfectly aware of.
This calculator uses 365 days to a year. On a large short-term loan, check which convention your contract specifies before comparing quotes.
Simple interest loans are not always simpler
A loan advertised as "simple interest" usually means interest accrues daily on the balance you still owe, rather than on a fixed schedule. Pay early in the month and less interest accrues; pay late and more does. That is genuinely different from a precomputed loan, where the total interest is fixed at signing and paying early saves you nothing unless there is a rebate clause.
Common questions
When is simple interest better for the borrower?
Always, at the same stated rate and term — it costs less than compound interest by definition. The catch is that products quoting simple interest sometimes carry higher rates or fees, so compare total cost rather than the label.
How do I convert a monthly rate to an annual one?
For simple interest, multiply by 12. A 1.5% monthly rate is 18% a year. This does not work for compound interest, where you would need (1.015)^12 − 1 = 19.56%.
Why does my loan statement show more interest than this?
Most consumer loans compound, and many accrue daily. If your statement is higher, the loan is probably not simple interest, or fees are being included in the figure. Check whether the contract states a periodic rate and how often it is applied.