Simple interest explainer
Watch how money grows each year with simple interest — a gentle introduction to how interest works.
Calculator personalLogic updated April 2026
This calculator illustrates simple interest — the same flat dollar amount earned every year on the original starting principal. Each year's interest is the same: principal × rate. The schedule shows the running balance year by year, making it easy to see the contrast with compound interest, where each year's interest grows on top of the previous year's.
How this is calculated
Formula
I = P × r × t ; annualInterest = principal × (rate / 100) ; balance(year n) = principal + n × annualInterestStep-by-step
- Calculate the annual interest amount: principal multiplied by rate divided by 100
- For each year of the projection, add this fixed interest to the cumulative interest total
- Year-end balance = principal + cumulative interest (the principal never grows under simple interest)
- The schedule reports start balance, interest earned, and end balance for each year
- Cap the projection at 20 years — simple interest is an educational illustration, not a long-term planning tool
- Rounding mode
- ROUND_HALF_UP
- Precision
- 20-digit internal precision (Decimal.js), rounded to 2 decimal places for display
- Logic last reviewed
Assumptions & limitations
What this calculator assumes
- Simple interest — the same dollar amount each year (not compound)
- Interest is applied once per year on the original starting amount
- Projection horizon is capped at 20 years
- No additional contributions or withdrawals are modelled
What this calculator doesn’t account for
- Simple interest is rarely used by real savings products — most accounts compound
- Doesn't model variable interest rates
- Doesn't include taxes or fees
- Doesn't show what compound interest would produce — pair with the compound interest calculator for that contrast
- Educational tool — not intended for serious long-horizon planning
Worked example
An investor puts $10,000 into an instrument that pays 5% simple interest for 10 years.
| Input | Value |
|---|---|
| Starting amount | $10,000 |
| Rate | 5% |
| Years | 10 |
Annual interest: $500/year — Final balance: $15,000 — Total interest: $5,000
Each year earns exactly $500 ($10,000 × 5%). After 10 years, total interest is $500 × 10 = $5,000, and the final balance is $15,000. Compare this to compound interest at the same rate, which would produce a final balance of about $16,289 — about $1,289 more, all from earning interest on prior interest. The gap widens dramatically over longer horizons.
Frequently asked questions
What is simple interest?
Interest calculated only on the original principal — never on the interest already earned. Each year's interest is exactly the same dollar amount: principal × rate. Because interest doesn't compound on itself, the balance grows in a straight line rather than a curve.
How is simple interest different from compound interest?
Compound interest pays on the growing balance — last year's interest gets added to the principal and earns interest itself. Simple interest only ever pays on the starting amount. Over short periods (1–2 years) the difference is small, but over decades the gap is enormous: $10,000 at 5% over 30 years is $25,000 simple but ~$43,200 compound.
When is simple interest used?
Most often in short-term loans, some bonds, and educational illustrations. Mortgages, credit cards, savings accounts, and most investment products use compound interest. If you're seeing simple interest quoted on a financial product, double-check — sometimes 'simple' is shorthand for 'we charge interest only on the unpaid principal' (which is actually how amortising loans work, where interest is recomputed each month on the remaining balance).
How do I calculate simple interest?
I = P × r × t, where P is principal, r is the annual rate as a decimal, and t is time in years. For $5,000 at 4% for 3 years: 5,000 × 0.04 × 3 = $600 of total interest. To find the final balance, add this to the principal: $5,000 + $600 = $5,600. The formula assumes the rate is annual; for monthly or other periods, divide r and multiply t accordingly.
Why do most savings products use compound interest?
Because compound interest is what naturally happens when interest is paid back into the account that's earning it — the new balance is now the basis for the next interest calculation. Simple interest requires actively transferring out the interest before the next period, which is unusual for savings products. Most accounts default to monthly or daily compounding because that's how the underlying accrual mechanics work.
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