What is Simple Interest?

How simple interest works, the I = Prt formula, when it applies, and how it compares to compound interest.

Simple interest vs. compound interest

Simple interest is calculated only on the original principal — the starting amount. No matter how long the loan or investment runs, interest is never earned on previously accumulated interest.

Compound interest is calculated on the principal plus all previously earned interest. That feedback loop causes exponential growth over time.

$5,000 at 6% for 5 years

Simple interest: $5,000 + ($300 × 5) = $6,500
Compound interest (annual): $6,691.13

The $191 gap is small at 5 years — but it widens dramatically over longer periods.

For short time horizons, the difference is modest. Over decades, compound interest produces substantially more growth than simple interest at the same rate.

The simple interest formula

Simple interest uses a single formula:

I = P × r × t

Where:

I — the interest earned or owed
P — the principal (starting amount)
r — the annual interest rate as a decimal (e.g. 5% → 0.05)
t — time in years

To find the total amount at the end of the period, add the interest to the principal: A = P + I, or equivalently A = P(1 + rt).

Worked examples

Example 1: Savings account

You deposit $2,000 at 4% simple interest for 3 years. How much interest do you earn?

I = 2,000 × 0.04 × 3
I = $240

Total: $2,000 + $240 = $2,240

Example 2: Short-term loan

You borrow $10,000 at 8% simple interest for 18 months. How much do you owe?

t = 18 months = 1.5 years

I = 10,000 × 0.08 × 1.5
I = $1,200

Total owed: $10,000 + $1,200 = $11,200

Where simple interest is used

Simple interest applies in a specific set of financial products and situations:

Auto loans: Most US car loans use simple interest. Your daily interest is recalculated based on your current principal balance, so paying early reduces total interest paid.

Short-term personal loans: Many personal loans and payday advance products advertise a flat fee or simple rate rather than a compounded APR — often making them appear cheaper than they are.

US Treasury bills: Short-term government securities under one year are priced using simple interest. The discount rate is applied once, not compounded.

Certificates of deposit (short-term): Some short-term CDs pay interest only at maturity using a simple interest calculation, rather than compounding it during the term.

Rearranging the formula

The I = Prt formula can be rearranged to solve for any of the four variables:

Find interest:    I = P × r × t
Find principal:   P = I / (r × t)
Find rate:        r = I / (P × t)
Find time:        t = I / (P × r)

For example, if you earned $180 in interest on a $3,000 deposit over 2 years, you can find the rate: r = 180 / (3,000 × 2) = 0.03 = 3%.

Try it: Simple Interest Calculator

Solve for interest, principal, rate, or time in seconds.

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Frequently asked questions

Is simple interest better or worse for borrowers?: For borrowers, simple interest is generally better than compound interest because you only owe interest on the outstanding principal — not on accumulated interest. This is why mortgages and credit cards use compound interest (better for lenders), while auto loans often use simple interest (slightly better for borrowers). The catch: with simple-interest auto loans, paying late increases interest costs because your balance stays higher longer.
What is the difference between APR and simple interest rate?: APR (Annual Percentage Rate) includes both the interest rate and any fees charged by the lender, expressed as a single annual percentage. A loan might advertise a 6% simple interest rate, but after origination fees, the APR could be 7.5%. Always compare APRs when evaluating loans — the simple rate alone does not reflect the true cost of borrowing.
Can simple interest be calculated for periods shorter than a year?: Yes — t just needs to represent the fraction of a year. A 6-month period is t = 0.5, a 90-day period is t = 90/365 ≈ 0.247, and so on. For daily calculations, divide the annual rate by 365 to get a daily rate, then multiply by the number of days.