Simple Interest Calculator

Interest on the principal only

Simple interest is principal times rate times time. It never charges interest on accumulated interest, which makes it linear: 1,000 at 5 percent earns 50 every year forever, whether it is year one or year thirty. That linearity is the whole distinction, and it is why simple interest is genuinely rare in modern finance outside specific instruments.

Where it actually applies

Most car loans in the US are simple-interest contracts, meaning interest accrues daily on the outstanding balance and paying early genuinely reduces the cost. Short-term promissory notes, some bonds' coupon calculations, and many statutory interest awards on court judgments use it. Certificates of deposit and savings accounts almost never do.

The divergence from compound

Over one year at the same rate the two are identical. Over ten years at 5 percent, simple interest turns 1,000 into 1,500 and annual compounding turns it into 1,629. Over thirty years the figures are 2,500 and 4,322. The gap is not a rounding difference; it is the entire argument for starting to invest early, and it is why a lender quoting simple interest on a long-dated loan is offering something unusually favourable.

Watch the time unit

The rate and the period must agree. An annual rate with a term in months requires dividing the rate by twelve or expressing the term in years. Mixing them is the most common arithmetic mistake here, and it produces answers wrong by a factor of twelve, which is at least easy to spot.

Day-count conventions are not trivia

Financial contracts specify how days are counted: 30/360 treats every month as 30 days and the year as 360, actual/365 uses real days, actual/actual uses real days and real year lengths. On a large short-term principal these produce materially different interest, which is why the convention is written into the contract rather than assumed.

Simple interest on a declining balance

A simple-interest car loan is not the same as a flat-rate loan, though both use the phrase. Simple interest accrues on the balance as it falls, so early payments reduce total cost. A flat-rate loan computes total interest on the original principal upfront, so paying early saves nothing — a structure common in some markets and considerably more expensive than the quoted rate implies.