Calculate simple interest and total repayment amount
Simple interest is calculated only on the original principal — unlike compound interest, it does not earn interest on accumulated interest. This makes it straightforward to calculate and easy to understand.
Interest = Principal × Rate × Years
Total Amount = Principal + Interest
A $2,000 loan at 6% for 3 years: Interest = $2,000 × 0.06 × 3 = $360. Total repaid = $2,360.
| Starting amount | Rate | Years | Simple interest total | Compound interest total |
|---|---|---|---|---|
| $1,000 | 5% | 5 | $1,250 | $1,276 |
| $1,000 | 5% | 10 | $1,500 | $1,629 |
| $1,000 | 5% | 20 | $2,000 | $2,653 |
| $1,000 | 5% | 30 | $2,500 | $4,322 |
For short time periods, the difference between simple and compound interest is small. Over long periods, compound interest grows dramatically larger. This is why compound interest is used for most investments and mortgages, while simple interest is used for short-term loans.
Simple interest is used in several common financial products. Car loans in some countries calculate interest on the original balance rather than the declining balance. Treasury bills and some short-term bonds pay simple interest. Payday loans are often described using simple interest rates, though their effective APR is much higher due to short terms. Student loans in some countries calculate daily simple interest on the outstanding balance.
Many loans calculate interest daily rather than annually. Daily simple interest is:
Daily interest = Principal × Annual Rate ÷ 365
For a $10,000 loan at 6% annual rate: Daily interest = $10,000 × 0.06 ÷ 365 = $1.64 per day. Making payments early reduces the principal, which reduces future daily interest charges — this is why paying even a few days early on a simple interest loan saves money.
Interest = Principal × Rate × Time. The rate should be expressed as a decimal (5% = 0.05) and time in years. To find total amount, add the interest to the principal.
Simple interest is used for short-term loans, some car loans, Treasury bills, and situations where the calculation needs to be straightforward and transparent. Compound interest is used for savings accounts, mortgages, credit cards, and most long-term financial products.
For borrowers, simple interest is generally better because it results in less total interest than compound interest over the same period. For lenders and savers, compound interest is better because it generates more return over time.
Divide the annual rate by 12 and multiply by the principal. At 6% annually on $5,000: Monthly interest = $5,000 × (0.06 ÷ 12) = $5,000 × 0.005 = $25 per month.
The simple interest rate is the stated rate used in the calculation. APR (Annual Percentage Rate) includes fees and other costs, making it a more complete measure of the true borrowing cost. A loan with a 5% simple interest rate and origination fees will have an APR higher than 5%.