What simple interest is
Simple interest is charged or earned only on the original principal. The interest each year is the same: principal times the annual rate. It never earns interest of its own, so the total grows in a straight line. The formula is I = P × r × t, where t is the time in years.
If your time period is in months, divide by 12 to get years; if it's in days, divide by 365 (or 360 if the contract uses a 360-day year). 18 months is 1.5 years; 90 days is 90 ÷ 365 = 0.2466 years.
Simple vs compound interest
Compound interest is charged or earned on the principal and on interest already added. Each period's interest is a little bigger than the last, so the balance grows faster and faster. Over short periods the two are close; over long periods compounding pulls far ahead. At 5% a year, $10,000 earns $1,500 of simple interest in 3 years, but $1,614.72 compounded monthly. Over 30 years the gap is $15,000 against $34,677.44.
Savings accounts, CDs and most investments compound, so use a compound interest or savings calculator for them. Simple interest shows up in short-term loans, promissory notes and many installment loans. Federal student loans, for example, charge simple daily interest on the outstanding principal.
Common mistakes
Mixing units is the most frequent error: a 6% annual rate over 9 months is 6% × 0.75, not 6% × 9. Another is treating a simple-interest loan like an installment loan. On an amortizing loan, each payment reduces the principal, so interest is charged on a shrinking balance and the total interest is less than P × r × t for the full term. This calculator assumes the principal stays the same for the whole period.
The simple interest formula
I = P × r × tTotal A = P + I = P × (1 + r × t)Compound (monthly) total = P × (1 + r ÷ 12)^(12t)- P = principal
- r = annual interest rate as a decimal (5% = 0.05)
- t = time in years (months ÷ 12, or days ÷ 365)
Example: $10,000 at 5% for 3 years
- I = 10,000 × 0.05 × 3 = $1,500.00.
- Total = $10,000 + $1,500 = $11,500.00.
- For 90 days instead: I = 10,000 × 0.05 × 90 ÷ 365 = $123.29 (or $125.00 on a 360-day year).
- Compounded monthly for 3 years, the same $10,000 at 5% would earn $1,614.72.
Frequently asked questions
How do I calculate simple interest per month?
Divide the annual interest by 12: P × r ÷ 12. On $10,000 at 5%, that's $41.67 a month.
How do I find the rate or time from the interest?
Rearrange the formula: r = I ÷ (P × t) and t = I ÷ (P × r). For example, $1,500 interest on $10,000 over 3 years is 1,500 ÷ 30,000 = 5% a year.
Is simple interest better than compound interest?
When you borrow, simple interest costs less because interest isn't charged on interest. When you save or invest, compound interest earns more. At equal rates and times, compound interest always produces at least as much as simple interest.
Do loans with monthly payments use simple interest?
Many charge interest only on the outstanding principal. Federal student loans, for example, use a simple daily interest formula. Because each payment reduces the principal, you pay less in total than P × r × t over the full term would suggest. Use the auto loan or student loan calculator for a payment schedule.
Sources
Last reviewed for 2026. How we calculate.