Simple Interest Calculator
By Alastair Hazell. Reviewed by Chris Hindle.
- Compound Interest
- Simple Interest
- Daily Compounding
- Forex Compounding
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How to calculate interest
To calculate simple interest on a lump sum, multiply your lump sum figure by the interest rate per period (as a decimal) and then again by the number of periods you wish to calculate for. The formula for this is P × r × t.
To give an example, if you wish to calculate simple interest on a $5,000 loan at a 3% annual interest rate for 2 years, your calculation would be:
5000 × 0.03 × 2 = $300
Likewise, if you borrow $500 from a friend at 3% per month for 6 months, your simple interest calculation would be:
500 × 0.03 × 6 = $90
Note that the interest rate (r) and time period (t) are in the same time units (years for the first calculation and months for the second). This is important for these interest calculations to work.
These simple interest calculations assume that interest is not compounded. Savings accounts earn compound interest, meaning that interest is calculated on the already accumulated interest over time. So, if you're looking to work out compound interest, you should use this interest calculator instead.
Simple interest formula (principal + interest)
If you wish to calculate a figure for interest AND principal, the formula for this is A = P(1 + rt), where P is the initial principal, r is the interest rate and t is the time period.
Where:
- A = the future value
- P = the initial principal
- r = annual interest rate (decimal)
- t = the time in years
Example calculation
Let's say that we want to lend a friend $5,000 at a yearly interest rate of 5% over 4 years. Your calculation might look like this:
Our formula: A = P(1 + rt)
- P = 5000.
- r = 5/100 = 0.05 (decimal).
- t = 4.
Plugging those figures into our simple interest formula, we get:
Your friend will owe you back $6,000 in 4 years time. Of that, the interest will be $1,000, which works out at $250 per year. The table below shows how the interest would accrue over each of the four years.
| Year | Principal | Total Interest | Total |
|---|---|---|---|
| 1 | $5,000 | $250 | $5,250 |
| 2 | $5,000 | $500 | $5,500 |
| 3 | $5,000 | $750 | $5,750 |
| 4 | $5,000 | $1,000 | $6,000 |
Variations of the simple interest formula
Here are some other useful variations of the simple interest formula, which allows you to calculate principal, rate of interest and timeframe.
| Calculation | Formula |
|---|---|
| Calculate principal+interest (A) | A = P(1 + rt) |
| Calculate interest only (I) | I = P × r × t |
| Calculate principal (P) based upon future value | P = A / (1 + rt) |
| Calculate interest rate as a percentage (R) | R = (1/t)(A/P - 1) × 100 |
| Calculate time factor (how long it takes to reach a target figure) (t) | t = (1/r)(A/P - 1) |
Where:
- A = future value of the investment/loan
- I = total interest
- P = principal amount
- r = interest rate (decimal)
- R = interest rate (percentage)
- t = time periods
What is simple interest?
Simple interest is a form of interest commonly used for transactions such as auto loans, student loans or personal loans.
A simple interest calculation takes a sum of money (principal) and calculates regular interest only on that original amount, without the effect of compounding. This is in direct contrast to compound interest, where accumulated interest is added back to the principal for each calculation, so that you effectively earn interest on already accumulated interest.
It is this difference that makes the simple interest calculation widely regarded as least advantageous to savers and most advantageous to borrowers. 1
See also: Daily Compounding | SIP Calculator | APY Calculator
How to use our simple interest calculator
To use our simple interest calculator, enter your starting balance, along with the annual interest rate and the start date (assuming it isn't today). Then, enter either a number of years, months or days that you wish to calculate for or an end date. You can also include any regular additional deposits and withdrawals (additions and deductions). Once you click the 'calculate' button, the simple interest calculator will show you:
- The total interest earned
- The final value (principal plus accrued interest)
- A monthly breakdown of interest earned
To conclude
I hope this calculator and article has helped you with calculating the interest on your savings or loan. If you have any questions or suggestions for improvements, please do drop me a line.
By Alastair Hazell Updated: November 24, 2022References
- What is the Difference Between Simple & Compound Interest?, The Motley Fool.
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