Simple Interest Calculator: How It Works
Simple interest is charged on the original principal only, and never on interest already accrued. It is the easier of the two interest models and the less common one — which makes knowing where it genuinely applies more useful than knowing the formula.
The formula
Interest = P × R × T ÷ 100
P is the principal, R the annual rate as a percentage, and T the time in years. Total repayable is P + interest. For part-years, express T as a fraction: nine months is 0.75, and 146 days is 146 ÷ 365 = 0.4.
On 50,000 at 8% for 3 years: 50,000 × 8 × 3 ÷ 100 = 12,000 interest, 62,000 total.
Where simple interest is actually used
- Short-term and bridging loans, where the term is too brief for compounding to matter.
- Gold and pawn loans in many markets.
- Some car and consumer finance, quoted as a flat rate.
- Late-payment penalties and statutory interest on overdue commercial invoices.
- Government savings certificates in non-cumulative form, where interest is paid out rather than reinvested.
Most bank deposits, credit cards, mortgages and investments use compound interest instead.
Simple versus compound, side by side
10,000 at 10%:
| Years | Simple | Compound (annual) | Difference |
|---|---|---|---|
| 1 | 11,000 | 11,000 | 0 |
| 5 | 15,000 | 16,105 | 1,105 |
| 10 | 20,000 | 25,937 | 5,937 |
| 20 | 30,000 | 67,275 | 37,275 |
| 30 | 40,000 | 174,494 | 134,494 |
They are identical for the first period and diverge without limit afterwards. Simple interest grows in a straight line; compound interest curves. Over a saving lifetime that difference is the whole game — which is why you want compound interest on your savings and simple interest on your debts.
The flat-rate trap
A lender quoting a 'flat' or 'simple' rate on an instalment loan is charging interest on the full original amount even though you are steadily repaying it. Borrow 100,000 over 3 years at 7% flat and you pay 21,000 interest — but your average outstanding balance across those three years is closer to 50,000. The true reducing-balance equivalent is around 13%. A flat rate is roughly 1.8–1.9× the equivalent reducing rate on a three-year term, and the multiple grows with the term.
Solving for the other variables
| To find | Rearranged formula |
|---|---|
| Principal | P = I × 100 ÷ (R × T) |
| Rate | R = I × 100 ÷ (P × T) |
| Time | T = I × 100 ÷ (P × R) |
The rate form is the practically useful one: given what you borrowed and what you repaid, it tells you the rate you were actually charged — which is not always the rate you were quoted.