The Complete Guide to Simple Interest
By Arshi Khan, Founder of Just4Marketing · Last reviewed October 2026
Simple interest is the most basic way interest is charged or earned: a fixed percentage of the original amount, for each year the money is borrowed or invested. This guide covers the I = P × r × t formula, how to handle months and days, and how simple interest compares with compound interest.
How simple interest is calculated
Simple interest only ever applies to the original principal. Borrow $5,000 at 6% a year for 3 years and the interest is $5,000 × 0.06 × 3 = $900, for a total of $5,900. Each year adds exactly the same $300, no matter how long the term.
That makes simple interest easy to predict and to check by hand, which is one reason it is common for short-term loans and informal agreements.
Simple vs. compound interest
Here is $5,000 at 6% under each method. The gap is small at first and widens as the years go by, because compound interest keeps building on a growing balance.
| Years | Simple interest total | Compounded annually |
|---|---|---|
| 1 | $5,300 | $5,300 |
| 5 | $6,500 | ≈ $6,691 |
| 10 | $8,000 | ≈ $8,954 |
| 20 | $11,000 | ≈ $16,036 |
Things to watch for
Use the annual rate
If a rate is quoted per month, multiply by 12 before using it here, or enter the time in months with the matching annual rate.
Check the day-count convention
A 360-day year (used by some banks) produces about 1.4% more interest than a 365-day year on the same terms.
Payments change the picture
If you repay part of a simple-interest loan early, interest from then on is charged only on the lower remaining principal.
Frequently asked questions
What is the simple interest formula?
I = P × r × t, where P is the principal, r is the annual rate as a decimal, and t is the time in years. The total amount at the end is P + I, or P × (1 + r × t).
How do I calculate simple interest for months or days?
Convert the time to years first. For months, divide by 12 (18 months = 1.5 years). For days, divide by 365 — though some lenders and bonds use a 360-day year, which gives slightly more interest.
Where is simple interest used?
It's common for short-term personal and business loans, some auto loans, certificates that pay interest out rather than reinvesting it, Treasury bills and bonds' coupon payments, and interest between family members or on overdue invoices.
Is simple interest better than compound interest?
It depends which side you're on. For a borrower, simple interest costs less over time. For a saver or investor, compound interest earns more, because interest itself starts earning interest.