Simple Interest - Definition, Formula & Calculator
Simple Interest means earning or paying interest only the Principal . The Principal is the amount borrowed, the original amount invested, or the face value of a bond . On this page, I explain the simple interest formula and provide a simple interest calculator that you can use to solve some basic problems.
For information about how simple interest applies to amortization, or if you are looking for a so-called "Simple Interest Mortgage" calculator, try our Simple Interest Loan Calculator.
Simple Interest Formula
Simple Interest is earned or paid on the Principal only.
"Simple Interest" is different than "Compound Interest". You don't earn interest on interest, and you don't pay interest on interest. The formula is indeed simple because it only involves multiplication:
Interest (I) = Principal (P) times Rate Per Period (r) times Number of Periods (n)
Divide an annual rate by 12 to get (r) if the Period is a month.
You'll often find the formula written using an annual interest rate where the number of periods is specified in years or a fraction of a year.
Interest (I) = Principal (P) times Annual Rate (r) times Time in Years (t)
The time can be specified as a fraction of a year (e.g. 5 months would be 5/12 years).
Simple Interest Calculator
This calculator was designed based to make it easy to use for both monthly and daily accrual calculations. The Days in Year only matter if you enter a value in the Days field. Normally, you'd enter only the days or only the months or only the years, but if you enter values in all 3 fields, the time is calculated as Years + Months/12 + Days/DaysInYear.
Simple Interest Example Problems
Try using the above calculator to solve the example problems listed below.
Example 1: You take out a loan of $10,000 that charges a annual rate of 6%. Using formula #1, the interest you pay on your first monthly payment is $10000*(6/100)/12*1=$50. Using formula #2 and the calculator, enter P=10000, r=6, and 1 month.
Example 2: You have a savings account that earns Simple Interest. Unlikely. Most savings accounts earn compound interest.
Example 3: My father loans me $2,000 to buy a used car and tells me I need to pay it off in one big chunk (a balloon loan). To be easy on me he will charge me simple interest based on an annual rate of 3%. I work really hard in the summer (using my car to deliver pizza), and am able to pay off the car in just 4 months. Using formula #2, the interest I owe my dad is $2,000*(3/100)*4/12=$20. Using formula #1, it would be $2,000*(3/100)/12*4=$20 (very basic algebra).
Example 4: Using the assumption that a year has 360 days (a common banking assumption sometimes used for prorating the interest between the close date of a loan and the date of the first payment), how much interest accrues over 20 days if the current Principal balance is $100,000 and the annual interest rate is 7.2%? Using simple interest formula #2, the total interest accrued would be $100,000*(7.2/100)*20/360=$400.
-  Simple Interest (Definition) at Answers.com
-  Principal (Definition) at Answers.com
- Simple Interest Calculator at WebMath.com - This calculator uses the simple interest formula and explains it well (it's not just an "easy" calculator).
- How Does Simple Interest Work at mtgprofessor.com - An explanation of simple interest loans and mortgages.
- Simple Interest Examples at MoneyInstructor.com
- The 360-Day Year - at mtgprofessor.com