Simple interest formula
A = P + I
P is the principal, r the annual rate as a decimal and t the time in years. A is the total amount at the end.
Simple vs. compound: a quick comparison
With simple interest, the same $300 is added every year to a $5,000 deposit at 6%. With annual compounding, year one adds $300, year two $318, year three about $337 — because interest is earned on interest. After 3 years compound interest gives $955 instead of $900; after 20 years the gap is about $5,000. Use the compound interest calculator to explore.
How to use the calculator
- Enter the principal — the amount borrowed or invested.
- Enter the annual interest rate.
- Enter the time in years, months or days.
- Read the interest and the total amount (principal + interest).
Simple vs. compound interest
| Rate on $5,000 for 3 years | Simple interest | Compound (annual) | Compound (monthly) |
|---|---|---|---|
| 3% | $450.00 | $463.63 | $470.26 |
| 5% | $750.00 | $788.13 | $807.36 |
| 6% | $900.00 | $955.08 | $983.40 |
| 8% | $1,200.00 | $1,298.56 | $1,351.19 |
| 10% | $1,500.00 | $1,655.00 | $1,740.91 |
Simple interest is charged only on the original principal; compound interest is also charged on interest already added. The gap is small over short periods but grows quickly over longer ones.
Where simple interest is used
- Auto loans and many personal loans use simple interest on the outstanding balance, recalculated as you pay down principal — paying early saves interest.
- Treasury bills, certificates of deposit and some bonds pay interest that is not reinvested.
- Short-term business credit and trade finance.
- Late payment interest on invoices, often set by law or contract as a simple annual rate.
Day-count conventions
For periods shorter than a year, interest depends on how days are counted:
- Actual/365: interest = P × r × days ÷ 365. Common for consumer loans and UK markets.
- Actual/360: interest = P × r × days ÷ 360. Used by many U.S. banks for commercial loans and money markets — it yields slightly more interest for the lender.
- 30/360: assumes every month has 30 days; used for many corporate bonds and mortgages.
On $5,000 at 6% for 90 days, actual/365 gives $73.97 and actual/360 gives $75.00.
Rearranging the formula
For example, if $5,000 earned $900 over 3 years, the rate was 900 ÷ (5,000 × 3) = 6% per year.