Simple interest grows in a straight line: the same fixed amount is earned or owed every period, calculated only on the original principal. It never compounds — the interest earned in year one does not itself earn interest in year two.
P is the principal, r is the annual interest rate as a decimal, and t is time in years. Multiply the three together and the result is the total interest — not the total amount owed, which is principal plus interest.
Working through an example
$1,000 at 5% simple interest for 3 years: I = 1000 × 0.05 × 3 = $150 in interest, for a total of $1,150. Every year contributes exactly $50, because each year’s interest is calculated on the same unchanging $1,000 — not on the growing balance.
Simple interest versus compound interest
Compound interest calculates each period’s interest on the current balance, which includes all previously earned interest — so the amount earned grows every period. Simple interest stays flat. Over short periods the difference is small; over long ones it becomes substantial. The same $1,000 at 5% for 20 years earns $1,000 in simple interest (doubling the principal) but $1,653 in interest compounded annually — the compounding adds an extra 65% on top of the simple case.
Where simple interest actually appears
Despite compounding being more common in savings and investment products, simple interest still shows up in specific places:
- Short-term loans. Many personal and auto loans use simple interest calculated on the remaining principal, recalculated each payment period.
- Bonds. Many bonds pay a fixed coupon calculated as simple interest on the face value, paid out rather than reinvested automatically.
- Certain promissory notes and private loans between individuals, where the simplicity of the calculation is itself a feature.
- Educational examples. Because the arithmetic is linear, simple interest is the standard starting point for teaching the concept of interest before introducing compounding.
A subtlety with loan repayments
On a simple-interest loan being paid down over time, interest is typically recalculated each period on the remaining balance — not the original principal — which means the interest portion of each payment shrinks over the life of the loan even though the rate never changes. This calculator assumes a lump-sum principal outstanding for the whole term, which suits a single deposit or a bond, but not an amortizing loan with regular payments; for that, use a loan payment or amortization calculator instead.