Simple Interest: Formula, Examples and When It's Used
Simple interest is the most straightforward way to calculate interest. It is charged or earned only on the original principal, never on interest that has already built up. That makes it easy to work out and easy to predict.
The simple interest formula
SI = P × R × T ÷ 100, where P is the principal, R is the yearly interest rate in percent and T is the time in years. The total amount is simply P + SI.
Worked example
If you lend 1,00,000 at 10% a year for 3 years, the interest is 1,00,000 × 10 × 3 ÷ 100 = 30,000. The total amount returned is 1,30,000. The default values in the calculator above use exactly these numbers.
Using months or days
Because the rate is yearly, time must be converted to years. Six months becomes 0.5 years. For days, the calculator divides by 365. Some banks and markets use 360 days for certain products, so their result may differ slightly.
Where simple interest is used
- Short-term personal loans between friends and family
- Some car loans and consumer loans in certain countries
- Interest during the moratorium period of many education loans
- Certain bonds and deposits that pay interest out rather than reinvesting it
Simple vs compound interest
Over short periods the two give similar results. Over longer periods compound interest grows much faster, because interest is added to the balance. If you are saving, compound interest works in your favour; if you are borrowing, a simple interest loan is usually cheaper than a compounding one at the same rate. Our compound interest calculator lets you compare.