Simple Interest Calculator
Simple interest is charged only on the original amount, never on interest already accrued. It is the easier calculation, and increasingly the rarer one.
Formula
I = P × r × t
- P = principal, r = annual rate as a decimal, t = years
- Simple interest is earned on the principal only, never on the interest
£1,000 at 5% for 3 years: 1,000 × 0.05 × 3 = £150
The Formula
Interest = Principal × Rate × Time
With the rate as a decimal and time in years.
£5,000 at 4% for three years earns 5,000 × 0.04 × 3 = £600, giving a total of £5,600.
The interest is the same every year, because it is always calculated on the original £5,000.
How It Differs From Compound
Compound interest pays interest on accumulated interest, so the balance accelerates. Over three years at these figures the gap is small, but it widens sharply with time.
Over twenty years, £5,000 at 4% simple earns £4,000. Compounded annually it earns about £5,956 — nearly half as much again.
Where You Still Meet It
Simple interest appears in short-term personal loans, some car finance, bonds paying a fixed coupon, and many "buy now pay later" arrangements.
It is generally better for a borrower and worse for a saver than compounding. Be alert to a related trap: a flat rate on a loan applies simple interest to the full original balance even though you are steadily repaying it, which makes the quoted rate look roughly half the equivalent APR.
Quick Reference
| Years | Simple interest | Compound interest | Difference |
|---|---|---|---|
| 1 | £50 | £50 | £0 |
| 5 | £250 | £276 | £26 |
| 10 | £500 | £629 | £129 |
| 20 | £1,000 | £1,653 | £653 |
| 30 | £1,500 | £3,322 | £1,822 |
Frequently Asked Questions
- What is simple interest?
- Interest calculated only on the original principal. £5,000 at 4 per cent earns £200 every year regardless of how long the money is held.
- How is it different from compound interest?
- Compound interest pays interest on interest already earned, so growth accelerates. Over long periods the difference becomes very large.
- Which is better for me?
- Simple interest is better if you are borrowing and worse if you are saving, because compounding works in favour of whoever holds the growing balance.
- Where is simple interest used?
- Short-term loans, some car finance, fixed-coupon bonds and buy now pay later agreements. Watch for flat rates, which look cheaper than the equivalent APR.