Simple interest is charged or earned only on the original principal, never on interest already added. The formula is I = P × r × t: principal times annual rate times time in years. $5,000 at 4% for 3 years earns $600 of simple interest, for a total of $5,600.
Simple interest is used for many short-term loans, some auto loans that accrue interest daily on the balance, Treasury bills priced on a discount basis, and classroom problems. When interest is added to the balance and itself earns interest, use the compound interest calculator instead; this page shows the gap between the two.
How to use the simple interest calculator
- Enter the principal: the amount borrowed or deposited.
- Enter the annual interest rate as a percentage.
- Enter the time and choose years, months or days.
- For a period in days, choose the day-count basis your lender or textbook uses: 365 days or a 360-day "banker’s year".
Formula
r is the annual rate as a decimal (4% = 0.04). t is in years: months ÷ 12, or days ÷ 365 (or ÷ 360). Rearranged, P = I ÷ (r t), r = I ÷ (P t) and t = I ÷ (P r).
Worked example
$5,000 at 4% simple interest for 3 years.
- I = 5,000 × 0.04 × 3 = $600.
- Total A = $5,000 + $600 = $5,600.
- Interest per day = 5,000 × 0.04 ÷ 365 = $0.55.
For 90 days on a 360-day basis: t = 90 ÷ 360 = 0.25, so I = 5,000 × 0.04 × 0.25 = $50. On a 365-day basis the same 90 days gives $49.32.
Compounded yearly instead, $5,000 at 4% for 3 years earns 5,000 × (1.043 − 1) = $624.32, which is $24.32 more.
Simple vs. compound interest
For short periods and low rates the two are close. Over long periods compound interest pulls far ahead because each year's interest earns interest too. Investor.gov's compound interest explainer shows the same effect. Simple interest is linear: doubling the time doubles the interest. Compound interest is exponential.
A 360-day year makes the daily rate slightly higher (r ÷ 360 instead of r ÷ 365), so the same nominal rate costs a borrower a little more. Check your loan agreement for the day-count convention. For percentages of a single amount see the percentage calculator.
Solving for the rate or the time
Rearrange I = P × r × t: rate r = I ÷ (P × t) and time t = I ÷ (P × r). Example: $300 of interest on $2,500 over 2 years is a rate of 300 ÷ (2,500 × 2) = 6% a year.
Caveats and assumptions
- Assumes no payments or withdrawals during the period; with periodic payments, interest is charged on the falling balance.
- Day-count conventions vary (actual/365, actual/360, 30/360); results can differ by a few cents.
- Taxes on interest income are not included.
Frequently asked questions
What is the simple interest formula?
I = P × r × t: principal × annual rate (as a decimal) × time in years.
How much simple interest does $5,000 earn at 4% for 3 years?
$600, for a total of $5,600.
How do I calculate simple interest for months?
Divide the months by 12 to get years. 18 months at 6% on $1,000 is 1,000 × 0.06 × 1.5 = $90.
What is a 360-day year?
A banking convention that treats the year as 360 days when calculating daily interest, which makes each day’s interest slightly larger than on a 365-day basis.
Is simple interest better than compound interest?
For a borrower, simple interest costs less over time; for a saver, compound interest earns more.
Sources
- Investor.gov (SEC) — What is compound interest? — simple vs. compound interest
- CFPB — Regulation Z, Appendix J — unit periods and day counts used in rate calculations
- OpenStax Prealgebra 2e — 6.4 Solve Simple Interest Applications — I = Prt with worked problems
This calculator gives estimates for planning and education only. It is not financial, tax or investment advice. Your lender, card issuer, employer or tax authority uses its own terms, fees and rounding, so confirm figures with them before deciding. See our disclaimer and how we build and check calculators.