Simple Interest Calculator
This calculator helps you determine the simple interest earned on an investment or the simple interest paid on a loan. Simple interest is calculated only on the principal amount, or on that portion of the principal amount that remains unpaid and has not been amortized.
Understanding Simple Interest
Simple interest is a straightforward method of calculating the interest charge on a loan or the earnings on an investment. Unlike compound interest, which calculates interest on the initial principal amount plus any accumulated interest, simple interest is calculated exclusively on the original principal amount. This makes it easier to calculate but often results in lower returns for investors and lower total costs for borrowers over extended periods compared to compound interest.
How Simple Interest Works
The formula for simple interest is:
Simple Interest (SI) = (Principal × Rate × Time) / 100
- Principal (P): This is the initial amount of money borrowed or invested.
- Rate (R): This is the annual interest rate expressed as a percentage.
- Time (T): This is the duration for which the money is borrowed or invested, usually in years.
The total amount repayable or receivable at the end of the term is the sum of the principal and the simple interest earned or paid: Total Amount = Principal + Simple Interest.
When is Simple Interest Used?
Simple interest is commonly used for:
- Short-term loans, such as personal loans or payday loans.
- Calculating interest on savings accounts or bonds over short periods.
- Some types of business financing.
While it's simpler to calculate, it's important to note that for long-term investments or loans, compound interest generally offers better returns for investors and leads to higher costs for borrowers due to the effect of earning interest on interest.
Example Calculation
Let's say you invest $5,000 (Principal) at an annual interest rate of 4% (Rate) for 3 years (Time).
- Principal (P) = $5,000
- Rate (R) = 4%
- Time (T) = 3 years
Using the simple interest formula:
SI = (5000 × 4 × 3) / 100 = $600
The total amount you would have after 3 years is:
Total Amount = $5,000 (Principal) + $600 (Simple Interest) = $5,600
This means you would earn $600 in interest over the 3-year period.