Plot No. 22 · Money & Finance
Simple Interest Calculator
Work out the simple interest on a sum of money using interest equals principal times rate times time. Rate is the annual percentage and time is in years. Simple interest is charged only on the original principal, so it does not compound and the interest is the same every year.
This is simple interest, charged only on the original principal, so it does not compound. A compounding account on the same rate would grow a little faster each year.
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How simple interest is worked out
Simple interest is the most basic way to charge or earn interest. You take the principal, multiply by the annual rate written as a decimal, and multiply by the time in years. In symbols that is interest equals principal times rate times time. The final balance is just the principal plus that interest.
The key feature is that interest is only ever calculated on the original principal. It never earns interest on previously earned interest, so the amount added is identical every year. That is what separates it from compound interest, where each year's interest is added to the balance and then itself earns interest, making the total grow faster the longer you leave it.
How to use the simple interest calculator
- Enter the principal, the starting sum of money.
- Enter the annual interest rate as a percentage and the time in years.
- Read off the interest earned and the final balance, and adjust the years to see the interest rise in a straight line.
Worked examples
Three-year deposit
Inputs: 5,000 principal, 4.5% annual rate, 3 years
Result: Interest is 5,000 times 0.045 times 3, which is 675, giving a final balance of 5,675.
Same rate, double the time
Inputs: 5,000 principal, 4.5% annual rate, 6 years
Result: Interest is exactly double the three-year case at 1,350, because simple interest adds the same 225 every year with no compounding.
Limitations and common mistakes
Edge cases and limitations
- It does not compound, so it understates the growth of any account that adds interest to the balance and then pays interest on that.
- Time is in whole or fractional years, so for a number of months you should enter months divided by 12.
- It assumes a single fixed rate for the whole period and no deposits, withdrawals or tax.
Common mistakes
- Using simple interest for a savings account or credit card that actually compounds, which gives the wrong figure over multiple years.
- Entering the rate as a decimal such as 0.045 instead of the percentage 4.5, which makes the interest a hundred times too small.
Frequently asked questions
How is simple interest calculated?
Simple interest is principal times the annual rate as a decimal times the number of years. On 5,000 at 4.5% for 3 years, that is 5,000 times 0.045 times 3, which is 675 of interest and a final balance of 5,675.
What is the difference between simple and compound interest?
Simple interest is calculated only on the original principal, so you earn the same amount every year. Compound interest is calculated on the principal plus any interest already added, so it grows faster over time. The same 5,000 at 4.5% over 3 years earns 675 simple, but slightly more if compounded annually.
When is simple interest actually used?
Simple interest shows up on some short-term loans, car finance quoted as flat rate, and certain bonds or savings products. Most everyday savings accounts and credit cards compound instead, so check which one applies before relying on these figures.
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