How it works
Simple interest is calculated once, on the original principal, for the whole period — it never earns interest on interest already accrued, which is what makes it "simple" and what separates it from compound interest. The interest earned is the same every single year, rather than growing as it would under compounding.
interest = principal × rate ÷ 100 × time (years)
total = principal + interest
Worked example
A $5,000 principal at 5% annual interest, over 3 years.
- Interest: $5,000 × 5% × 3 = $750.
- Total: $5,000 + $750 = $5,750.
$5,000 at 5% simple interest earns exactly $750 over 3 years — $250 a year, every year, since none of that interest is reinvested to earn more.
Common questions
Where is simple interest actually used?
Some short-term loans, certain bonds, and some auto loans use simple interest. Savings accounts, credit cards and most mortgages compound instead, which is why the Compound Interest Calculator is the more commonly needed of the two for everyday saving and borrowing.
Why is compound interest always higher for the same rate?
Because compounding lets each period's interest join the balance and start earning its own interest, while simple interest keeps calculating against the same original principal the whole time. Over short periods the difference is small; over many years it becomes substantial.