Simple interest is interest calculated only on the original amount of money — the principal. It never includes interest that has already been earned, so the interest is the same in every period. If you lend $2,000 at 5% simple interest, you earn $100 a year whether it is the first year or the fifth.
The simple interest formula
SI = P × R × T ÷ 100
- P — principal, the amount borrowed or invested
- R — annual interest rate as a percentage
- T — time in years
The total amount repaid or received is the principal plus the interest:
A = P + SI = P × (1 + R × T ÷ 100)
Example 1: years
You deposit $2,000 at 5% simple interest for 4 years.
SI = 2,000 × 5 × 4 ÷ 100 = $400. Total = $2,400. Each year adds exactly $100.
Example 2: months
A $12,000 loan at 8% for 30 months. Convert months to years first: 30 ÷ 12 = 2.5.
SI = 12,000 × 8 × 2.5 ÷ 100 = $2,400.
Example 3: days
For periods in days, divide by the number of days in a year. Using 365 days, $10,000 at 5% for 90 days:
T = 90 ÷ 365 = 0.246575 years, so SI = 10,000 × 5 × 0.246575 ÷ 100 = $123.29.
Some lenders and money markets divide by 360 instead (the “Actual/360” convention), which gives $125.00 for the same loan. The convention is part of the contract, so it is worth checking.
Where simple interest is used
- Short-term loans and promissory notes, including informal loans between friends or family.
- Car loans and many personal loans, where each month’s interest is simple interest on the outstanding balance. Because you repay principal every month, the interest falls over time.
- Treasury bills and some short-term deposits quoted for a fixed number of days.
- Interest on late payments, which is usually simple.
- Bonds that pay out coupons — if you spend the coupons rather than reinvest them, your return behaves like simple interest.
Advantages and disadvantages
For a borrower, simple interest is cheaper than compound interest at the same rate, and easy to predict. For a saver, it is the opposite: your money grows in a straight line rather than a curve, so you miss out on interest earning interest.
The difference is small over a year or two but large over decades. At 6%, simple interest on $10,000 for 30 years is $18,000; with annual compounding it is about $47,435. See the full comparison in Simple Interest vs Compound Interest.
Working backwards
The formula can be rearranged to find any missing value:
- Rate:
R = SI × 100 ÷ (P × T) - Time:
T = SI × 100 ÷ (P × R) - Principal:
P = SI × 100 ÷ (R × T)
For example, if $1,000 grew to $1,300 in 5 years with simple interest, R = 300 × 100 ÷ (1,000 × 5) = 6%.
Key takeaways
- Simple interest is calculated on the original principal only.
- It grows by the same amount every period.
- Always convert time to years: months ÷ 12, days ÷ 365 (or 360 if the contract says so).
- Over long periods, compound interest grows far faster.
Try your own numbers with the Simple Interest Calculator.