What is simple interest?
Simple interest is interest worked out only on the money you originally put in — the principal — and never on the interest that money has already earned. Because the base never changes, the amount of interest added in each period is identical from start to finish. That predictability is exactly why simple interest is common for short-term loans, fixed deposits, and many car or personal loans.
Compound interest, by contrast, keeps adding each round of interest back into the balance so that future interest is calculated on a larger and larger figure. Over short periods the two are close; over long periods compound interest pulls well ahead.
How is simple interest calculated?
The core formula is I = P × r × t, where I is the interest, P is the principal, r is the annual rate written as a decimal, and t is the time in years. The final balance is simply the principal plus that interest: A = P × (1 + r × t).
For example, $1,000.00 at 6% for two years earns 1000 × 0.06 × 2 = $120.00 in interest, for a final balance of $1,120.00. Notice that each year contributes the same $60.00 — there is no snowball effect.
Example: $10,000 at 5% for 5 years
The table below is produced by the same engine that powers the calculator above. The yearly interest stays flat at exactly $500.00 because it is always 5% of the original $10,000.00 — never more, never less.
| Year | Interest | Total interest | Balance |
|---|---|---|---|
| 1 | $500.00 | $500.00 | $10,500.00 |
| 2 | $500.00 | $1,000.00 | $11,000.00 |
| 3 | $500.00 | $1,500.00 | $11,500.00 |
| 4 | $500.00 | $2,000.00 | $12,000.00 |
| 5 | $500.00 | $2,500.00 | $12,500.00 |
Adding regular deposits or withdrawals
Real savings rarely sit untouched. If you pay money in on a schedule, switch the contributions control to Additions: each deposit raises the balance that earns interest from the moment it lands, though that interest is still simple. Choose Deductions to model regular withdrawals, which lower the interest-earning balance over time.
When is simple interest used?
You will most often meet simple interest on fixed-term deposits, treasury and corporate bonds that pay a flat coupon, short bridging loans, and many instalment loans for cars or appliances. Knowing the difference from compound interest helps you compare offers fairly. This tool is for illustration only and is not financial advice.
Frequently asked questions
What is the difference between simple and compound interest?+
Simple interest is always calculated on the original principal alone, so the interest you earn each period stays the same. Compound interest is calculated on the principal plus any interest already added, so it grows faster over time. For the same rate and term, compound interest always ends up higher.
How is simple interest calculated?+
The formula is I = P × r × t, where P is the principal, r is the annual interest rate as a decimal, and t is the time in years. The final balance is the principal plus that interest: A = P × (1 + r × t).
Can I include regular deposits or withdrawals?+
Yes. Switch the contributions control to Additions or Deductions and choose an amount and frequency. Each addition increases the balance that earns interest from then on; each deduction reduces it. Interest is still simple — it is never charged on previously earned interest.
Does the compounding frequency matter for simple interest?+
No. Because simple interest never earns interest on itself, there is no compounding frequency to choose. Only the rate, the principal and the length of time affect the result.
What is the monthly interest figure?+
It is the interest earned in a single month on your initial principal: principal × annual rate ÷ 12. With a fixed principal and rate this amount is the same every month, which is what makes simple interest "simple".