Simple Interest

What is Simple Interest?

Simple Interest is a form of interest used for transactions, which could be car loans, student loans, personal loans, or any other kind of loan.

A regular amount of interest is added onto the original amount (prinicpal) plus any contributions that have been made during the period. There is no compounding taken place on the accumulated interest which is added back to the prinicpal for each calculation. If you need to compute compounding interest instead of simple interest, use our compounding interest calculator instead.

How to calculate Simple Interest

Simple Interest has a pretty straightforward formula making it easy to calculate. It is simply: P * r * t, where P = the principal amount, r = the interest rate, and t = the number of periods.

For example, if you needed to calculate simple interest on a $10,000 loan at a 4.25% annual interest rate for 8 years, the calculation would look like this:

Making the most of Simple Interest

• Choose Higher Interest Rates: Since simple interest is calculated only on the principal, finding accounts or investments with higher interest rates can increase your earnings over time.
• Keep Principal Intact: To maximize the interest earned, try not to withdraw from your principal. Simple interest is calculated solely on the original amount, so reducing it will lower your earnings.
• Negotiate for Shorter Terms: In certain loans or savings agreements, interest is applied over a specific term. Opt for shorter terms to pay less interest if you’re borrowing, or consider longer-term deposits for consistent earnings if you’re saving.
• Make Lump-Sum Payments: If you’re dealing with loans, paying off lump sums can help reduce your overall interest costs. For savings, adding lump sums increases the base on which interest is calculated.
• Understand Fixed Interest: Simple interest remains constant throughout the term. This predictability can be useful when budgeting, allowing you to know exactly how much interest you’ll earn or owe over time.
• Use Simple Interest for Short-Term Investments: Since simple interest doesn’t grow exponentially like compound interest, it is more beneficial for short-term investments or loans where the time factor isn’t as significant.