Simple Interest Calculator
The Simple Interest Calculator helps you determine the returns on your investment based on a fixed principal amount and interest rate.
How to use:
- 1Principal Amount ($): Enter your initial investment amount
- 2Annual Interest Rate (%): Input the expected yearly return rate
- 3Time Period: Select the investment duration in years
- 4Click 'Calculate' to view your simple interest projection
calculation parameters
Breakdown
Results
Balance Accumulation Graph
Schedule
| Year | Interest | Balance |
|---|---|---|
| 1 | $0.00 | $2,000.00 |
| 2 | $0.00 | $2,000.00 |
| 3 | $0.00 | $2,000.00 |
| 4 | $0.00 | $2,000.00 |
| 5 | $0.00 | $2,000.00 |
| 6 | $0.00 | $2,000.00 |
| 7 | $0.00 | $2,000.00 |
| 8 | $0.00 | $2,000.00 |
| 9 | $0.00 | $2,000.00 |
| 10 | $0.00 | $2,000.00 |
What is Simple Interest?
Interest is the cost you pay to borrow money or the compensation you receive for lending money. You might pay interest on an auto loan or credit card, or receive interest on cash deposits in interest-bearing accounts, like savings accounts or certificates of deposit (CDs).
Simple interest is interest that is only calculated on the initial sum (the "principal") borrowed or deposited. Generally, simple interest is set as a fixed percentage for the duration of a loan. No matter how often simple interest is calculated, it only applies to the original principal amount. In other words, future interest payments won't be affected by previously accrued interest.
What Financial Instruments Use Simple Interest?
For Borrowers
Simple interest works in your favor as a borrower, since you're only paying interest on the original balance. That contrasts with compound interest, where you also pay interest on any accumulated interest. You may see simple interest on short-term loans.
For Investors
For this same reason, simple interest does not work in your favor as a lender or investor. Investing in assets that don't offer compound growth means you may miss out on potential growth. However, some assets use simple interest for simplicity — for example bonds that pay an interest coupon. Investments may also offer a simple interest return as a dividend. To take advantage of compounding you would need to reinvest the dividends as added principal.
Simple Interest Versus Compound Interest
Compound interest is another method of assessing interest. Unlike simple interest, compound interest accrues interest on both an initial sum as well as any interest that accumulates and adds onto the loan. (In other words, on a compounding schedule, you pay interest not just on the original balance, but on interest, too.)
Over the long run, compound interest can cost you more as a borrower (or earn you more as an investor). Most credit cards and loans use compound interest. Savings accounts also offer compounding interest schedules. You can check with your bank on the frequency of your accounts.
Simple Interest Formula
You may also see the simple interest formula written as:
Where:
- • = total interest
- • = Principal amount
- • = interest rate per period
- • = number of periods
Simple Interest for Different Frequencies
Under this formula, you can calculate simple interest taken over different frequencies, like daily or monthly. For instance, if you wanted to calculate monthly interest taken on a monthly basis, then you would input the monthly interest rate as “r” and multiply by the “n” number of periods.
Example:
Let's calculate the simple interest on a loan with these parameters:
- • Principal (P) = 10,000
- • Annual interest rate (r) = 5% = 0.05
- • Time (n) = 3 years
Calculation: