How to calculate simple interest
Simple interest is the easiest type of interest to work out. Multiply the principal (the starting amount) by the annual rate as a decimal, then by the time in years. Add the interest to the principal to get the final amount. Unlike compound interest, simple interest is only ever calculated on the original principal — never on interest already earned.
The formula
Interest = Principal × Rate × Time (I = P × r × t)
The rate is a decimal (5% = 0.05) and time is in years (six months = 0.5). The final amount is simply P + I.
Worked examples
- $5,000 at 5% for 3 years: 5,000 × 0.05 × 3 = $750 interest → final amount $5,750.
- $8,000 at 4% for 5 years: 8,000 × 0.04 × 5 = $1,600 interest → final amount $9,600.
Simple vs compound interest
Because simple interest never earns interest on interest, it falls behind compound interest over time. On $10,000 at 6% for 10 years, simple interest earns $6,000, while compound interest earns about $7,908 — nearly $1,900 more from the same rate. The longer the period, the wider the gap.
Solving for rate or time
You can rearrange the formula: rate = Interest ÷ (P × t) and time = Interest ÷ (P × r). That's handy when you know how much interest you paid or earned and want to back out the rate.
Common mistakes to avoid
Entering the rate as a whole number in a formula instead of a decimal (use 0.05, not 5). Mixing up months and years — convert months to a fraction of a year. Assuming a savings account uses simple interest; most use compound. Forgetting that simple interest ignores any extra deposits or withdrawals.
Frequently asked questions
What is 5% simple interest on $5,000 for 3 years?
$5,000 × 0.05 × 3 = $750 interest, for a final amount of $5,750.
How is this different from compound interest?
Compound interest also earns interest on past interest, so over time it produces more than simple interest at the same rate.
When is simple interest used?
Some short-term and car loans, certain bonds, and informal loans. Savings and most long-term investments use compound interest.
Can I solve for the rate or time?
Yes. rate = Interest ÷ (P × t); time = Interest ÷ (P × r).
How do I enter six months?
As 0.5 in the years field. Any fraction of a year works.
Does it compound?
No — simple interest never earns interest on interest, which is why it grows slower.
Is my data saved?
No. Everything runs in your browser; nothing is uploaded.