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Back to Finance CalculatorsUnderstanding Simple Interest
Simple interest is calculated only on the principal amount, not on accumulated interest. It's the most straightforward type of interest calculation, commonly used for short-term loans, car loans, and some savings accounts. The formula is: Interest = Principal × Rate × Time.
Unlike compound interest where interest earns interest, simple interest remains constant throughout the loan or investment period. For example, if you invest $10,000 at 5% simple interest for 3 years, you'll earn exactly $1,500 ($10,000 × 0.05 × 3), resulting in a total of $11,500. The interest earned each year stays at $500.
Simple interest is easier to calculate and understand than compound interest, making it useful for quick estimates and short-term financial planning. However, for long-term investments, compound interest typically yields better returns. Use our calculator to quickly compute simple interest for any scenario.
Frequently Asked Questions
What's the formula for simple interest?
The simple interest formula is: I = P × R × T, where I is interest, P is principal amount, R is annual interest rate (as a decimal), and T is time in years. For example, $1,000 at 5% for 2 years: I = $1,000 × 0.05 × 2 = $100.
When is simple interest used instead of compound interest?
Simple interest is typically used for short-term loans (under 1 year), car loans, and some personal loans. Banks and credit card companies usually use compound interest for deposits and long-term loans because it's more profitable. Simple interest makes calculations transparent and predictable.
How do I convert monthly interest rate to annual rate?
To convert a monthly rate to annual, multiply by 12. For example, 1% monthly becomes 12% annually (1% × 12). To convert annual to monthly, divide by 12. So 12% annually becomes 1% monthly (12% ÷ 12). Always use annual rates in simple interest calculations.
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