The simple interest formula
Total amount A = P + I = P × (1 + r × t)
P is the principal (the amount you borrow or deposit), r is the annual interest rate as a decimal, and t is the time in years. If time is given in months, divide by 12. If it is given in days, divide by 365.
Example
Deposit 5,000 at 6% simple interest for 3 years. I = 5,000 × 0.06 × 3 = 900, so the total is 5,900. The interest is the same every year: 300.
Simple versus compound interest
With compound interest, each year's interest is added to the balance before the next year's interest is worked out. The same 5,000 at 6% compounded yearly for 3 years grows to about 5,955, so the interest is 955, which is 55 more than with simple interest. The gap widens the longer the money is invested. Our compound interest calculator shows this with monthly deposits, and the guide on how compound interest works explains why it matters.
Where simple interest is used
- Some short-term personal loans and car loans
- Certain bonds and treasury bills that pay a fixed amount each period
- Late-payment charges on invoices
- Textbook and exam questions
Working out the other variables
r = I ÷ (P × t)
t = I ÷ (P × r)
If you know the interest and two of the other values, rearrange the formula to find the missing one.