Simple Interest Calculator

What is Simple Interest?

Simple interest is a way of calculating the interest charge on a loan or deposit. It is calculated as the product of the principal amount, interest rate, and the number of time periods. The formula for simple interest is:

Where:

• I is the interest
• P is the principal amount
• r is the interest rate
• t is the time period in years

Simple interest is different from compound interest, where interest is calculated not only on the original principal but also on the accumulated interest from previous periods.

Example of Difference Between Simple and Compound Interest

Suppose you have $1000 as a principal amount and the interest rate is 5% per year.

Simple Interest:

• In this case, the interest earned would be $50 per year, calculated as $1000 × 5% = $50.
• Over a period of two years, the total interest earned would be $100 (i.e. $50 × 2), and the total amount owed would be $1100 ($1000 + $100).

Compound Interest:

• In this case, the interest earned would be calculated on both the principal amount and any accumulated interest from previous periods.
• For example, in the first year, the interest earned would be $50, calculated as $1000 × 5% = $50.
• In the second year, the interest would be calculated on a new principal amount of $1050 (i.e. $1000 + $50), which results in an interest charge of $52.5 (i.e. $1050 × 5% = $52.5).
• Over the two-year period, the total interest earned $1000 + $102.5.

As you can see, with compound interest, the interest earned increases over time, while with simple interest, it remains constant.

More Examples of Simple Interest

Here are two more examples of simple interest:

Example 1:

• You take out a loan of $5000 for two years at an interest rate of 7% per year.
• The simple interest earned would be $700, calculated as $5000 × 7% × 2 = $700.
• The total amount owed after two years would be $5700 ($5000 + $700).

Example 2:

• You deposit $3000 into a savings account that pays 5% interest per year.
• The simple interest earned after one year would be $150, calculated as $3000 × 5% = $150.
• The total amount in the savings account after one year would be $3150 ($3000 + $150).