The simple interest formula
P is the principal (the amount borrowed or deposited), r the yearly rate as a decimal and t the time in years. For months, divide by 12; for days, divide by 365.
Example: $5,000 at 6% for 3 years earns $5,000 × 0.06 × 3 = $900 in interest, for a total of $5,900. With monthly compounding the same deposit would earn about $983.40.
Simple versus compound interest
Simple interest is only ever charged on the original principal. Compound interest is charged on the interest already added too, so it grows faster the longer it runs. Car loans, many personal loans and some bonds use simple interest; savings accounts and credit cards compound. For compounding, use the compound interest calculator.
To find a missing value, rearrange the formula: rate r = I ÷ (P × t), time t = I ÷ (P × r), and principal P = I ÷ (r × t).
Frequently asked questions
How do I calculate simple interest?
Multiply the principal by the yearly rate as a decimal and by the time in years. $2,000 at 5% for 2 years is $2,000 × 0.05 × 2 = $200.
How do I calculate simple interest for months?
Divide the months by 12 to get years. 18 months is 1.5 years, so $1,000 at 4% for 18 months earns $60.
Which is better, simple or compound interest?
If you are borrowing, simple interest costs less. If you are saving, compound interest earns more.
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