The Formula
Simple interest is charged on the original principal and on nothing else. Interest already earned does not itself earn interest, which is the single difference from compounding:
I = P × r × t
where P is the principal, r the annual rate as a decimal, and t the time in years. Rearranged, the same equation solves for any of the four values: P = I / (rt), r = I / (Pt), t = I / (Pr). The calculator does the rearranging for you — pick what to solve for and fill in the rest.
The Time Unit Trap
The rate and the time must use the same unit. A 6% annual rate with t entered as 36 gives interest for 36 years, not 36 months. Converting is straightforward — 36 months is 3 years, 90 days is 90/365 of a year — and the calculator handles it once you choose the unit.
Lenders differ on the denominator. Most consumer lending uses 365 days; some commercial and money-market instruments use a 360-day year, which makes daily interest about 1.4% higher than the 365-day figure for the same quoted rate.
Simple Against Compound
On $10,000 at 6%, the two methods diverge slowly at first and then not slowly at all:
| Years | Simple | Compound (annual) | Difference |
|---|---|---|---|
| 1 | $10,600 | $10,600 | $0 |
| 3 | $11,800 | $11,910 | $110 |
| 5 | $13,000 | $13,382 | $382 |
| 10 | $16,000 | $17,908 | $1,908 |
| 25 | $25,000 | $42,919 | $17,919 |
They are identical for the first year by definition — there is nothing accumulated to compound yet. The gap then widens at an accelerating pace, which is why simple interest is confined to short-dated arrangements in practice.
Where Simple Interest Is Actually Used
- Car loans in the United States — most are simple-interest loans, where interest accrues daily on the outstanding balance. Paying early genuinely reduces the total.
- Promissory notes and personal IOUs — a flat percentage for a fixed term is easy to write down and hard to argue about.
- Treasury bills and short-term commercial paper — discount instruments quoted on a simple basis.
- Court-awarded interest on judgments — many jurisdictions specify statutory simple interest.
- Some mortgages outside the U.S. — simple-interest daily accrual is standard in parts of Europe and Australia.
Simple Interest Loans Reward Early Payment
On a true simple-interest loan, interest accrues per day on what you owe. Paying a week early means seven fewer days of accrual, and the saving is yours. On a precomputed-interest loan — still found in some subprime auto lending — the total interest is fixed at signing and early payment saves nothing unless the contract includes a rebate clause. The distinction is worth reading the paperwork for.
Frequently Asked Questions
Is simple interest better for a borrower or a saver?
Better for a borrower, worse for a saver. A borrower pays less than under compounding; a saver earns less. This is exactly why savings products compound and short-term loans often do not.
What is the difference between simple interest and APR?
APR is a disclosure standard that folds fees into an annualized rate so that loans can be compared. Simple interest is a method of calculation. A loan can be quoted at an APR while accruing interest on a simple daily basis — the two describe different things.
Can the rate be negative?
The formula handles a negative rate arithmetically, but the calculator rejects it. Negative rates appear in central-bank policy, not in consumer lending or savings.