Simple interest is a straightforward method of calculating the interest charge on a loan or the earnings on an investment. It's calculated based on the original principal amount only, and does not account for compounding interest (where interest is earned on previously accrued interest). This makes it easier to understand and predict for short-term financial arrangements.
The Simple Interest Formula
The formula for calculating simple interest is:
Interest (I) = P × R × T
Where:
P represents the Principal amount (the initial sum of money borrowed or invested).
R represents the Annual interest rate (expressed as a decimal).
T represents the Time period (in years) for which the money is borrowed or invested.
Calculating Total Repayment
To find the total amount to be repaid (or the total value of an investment including interest), you add the calculated simple interest to the original principal amount:
Total Repayment (A) = P + I
Or, substituting the formula for I:
A = P + (P × R × T)
This can also be simplified to:
A = P × (1 + R × T)
When is Simple Interest Used?
Simple interest is commonly used in various financial contexts:
Short-term loans: Many personal loans, payday loans, and car loans may use simple interest for shorter repayment periods.
Savings bonds and some certificates of deposit (CDs): These fixed-term investments often pay simple interest.
Calculating interest on overdue payments: Some late fees might be calculated using simple interest.
Basic financial education: It's often the first type of interest taught due to its simplicity.
Example Calculation
Let's say you take out a loan with the following details:
Principal (P) = $5,000
Annual Interest Rate = 8%
Time Period = 3 years
First, convert the annual interest rate to a decimal: 8% = 0.08.
Now, calculate the simple interest:
I = $5,000 × 0.08 × 3 = $1,200
Next, calculate the total repayment amount:
A = $5,000 + $1,200 = $6,200
So, over 3 years, you would pay $1,200 in simple interest, and the total amount repaid would be $6,200. This calculator helps you perform such calculations quickly and accurately.
function calculateSimpleInterest() {
var principalInput = document.getElementById("principal");
var annualRateInput = document.getElementById("annualRate");
var timePeriodInput = document.getElementById("timePeriod");
var principal = parseFloat(principalInput.value);
var annualRate = parseFloat(annualRateInput.value);
var timePeriod = parseFloat(timePeriodInput.value);
var totalInterestElement = document.getElementById("totalInterest");
var totalRepaymentElement = document.getElementById("totalRepayment");
// Clear previous results if inputs are invalid
totalInterestElement.textContent = "–";
totalRepaymentElement.textContent = "–";
// Input validation
if (isNaN(principal) || principal < 0 ||
isNaN(annualRate) || annualRate < 0 ||
isNaN(timePeriod) || timePeriod < 0) {
alert("Please enter valid positive numbers for all fields.");
return;
}
// Convert annual rate from percentage to decimal
var rateDecimal = annualRate / 100;
// Calculate simple interest
var simpleInterest = principal * rateDecimal * timePeriod;
// Calculate total repayment amount
var totalRepayment = principal + simpleInterest;
// Display results, formatted to two decimal places
totalInterestElement.textContent = "$" + simpleInterest.toFixed(2);
totalRepaymentElement.textContent = "$" + totalRepayment.toFixed(2);
}