Simple Interest Calculator
Your details
Result
Answer
- Total amount
- $12,500
- Interest
- $2,500
- Same terms, compounded annually
- $12,763
- Compounding advantage
- $263
- Working
- I = P × R × T = 10000 × 0.05 × 5 = 2500
- Simple interest earns the same $500.00 every year, because it always applies to the original $10,000.00 and never to interest already earned.
- Compounding the same rate annually would reach $12,762.82 instead of $12,500.00 — $262.82 more, from nothing but letting the interest earn interest. Over 5 years that gap is 10.5% of the simple interest itself, and it widens every year.
Year by year
Simple interest adds a flat amount each year; compounding adds a growing one.
| Year | Interest that year | Simple total | Compounded | Gap |
|---|---|---|---|---|
| 1 | $500.00 | $10,500.00 | $10,500.00 | $0.00 |
| 2 | $500.00 | $11,000.00 | $11,025.00 | $25.00 |
| 3 | $500.00 | $11,500.00 | $11,576.25 | $76.25 |
| 4 | $500.00 | $12,000.00 | $12,155.06 | $155.06 |
| 5 | $500.00 | $12,500.00 | $12,762.82 | $262.82 |
How do you calculate simple interest?
To calculate simple interest, multiply the principal by the annual rate and by the time in years — the formula I = PRT. On $10,000 at 5% for five years that is $2,500 of interest, giving a total of $12,500.
I = P × R × T A = P(1 + RT)- I
- Interest earned or owed
- P
- Principal — the original amount
- R
- Annual rate as a decimal; 5% is 0.05
- T
- Time in years; use a fraction for part years
- A
- The total amount, principal plus interest
Simple interest applies the rate to the original principal every period and never to interest already earned. That makes it a single multiplication and makes the growth perfectly linear: $10,000 at 5% earns exactly $500 in year one and exactly $500 in year twenty. Because the formula has four variables and one equation, knowing any three gives the fourth — rearranged, P = I ÷ RT, R = I ÷ PT and T = I ÷ PR, which is what the solve-for selector does. The practical question is where simple interest actually applies, and the answer is narrower than most people expect: short-term loans, car finance in some markets, bonds paying a fixed coupon, and most legal interest on judgments and late payments. Savings accounts, credit cards and mortgages all compound. The comparison on this page exists because the gap is not small — the same 5% compounded annually turns $2,500 of simple interest into $2,763 over five years, and the difference grows with every year that passes.
- Convert the annual rate to a decimal by dividing by 100.
- Express the time in years, using a fraction for part years.
- Multiply principal by rate by time for the interest.
- Add the interest to the principal for the total amount.
- To solve for another variable, divide by the other two.
Worked example: $10,000 at 5% simple interest for 5 years
$10,000 at 5% simple interest for 5 years
The rate of 5% becomes 0.05 as a decimal. Multiplying gives I = 10,000 × 0.05 × 5 = $2,500 of interest, so the total amount is $12,500. The interest is exactly $500 in every one of the five years, because simple interest always applies to the original $10,000 and never to interest already earned — the growth is a straight line. Compounding the same 5% annually instead reaches 10,000 × 1.05⁵ = $12,762.82, which is $262.82 more for no change in rate, principal or term. That gap is 10.5% of the simple interest itself, and it comes entirely from the interest earning interest. Over 20 years the same comparison is far starker: $20,000 simple against $26,532.98 compounded, a difference of $6,532.98. Running the formula backwards confirms the arithmetic — to earn $2,500 at 5% takes 2,500 ÷ (10,000 × 0.05) = 5 years.
What each simple interest input means
- What are you solving for?
- I = PRT has four variables. Give any three and this returns the fourth.
- Principal
- The starting amount, lent or invested.
- Annual interest rate
- The annual rate. Simple interest applies it to the original principal every period, never to accumulated interest.
- Time
- In years. Use a fraction for shorter terms — 90 days is roughly 0.25.
- Interest you want
- Used when solving for principal, rate or time.
What this simple interest does not account for
- Most real financial products compound rather than using simple interest. Savings accounts, credit cards and mortgages all compound; simple interest mainly appears in short-term loans, bonds and statutory interest.
- Time must be in the same unit as the rate. An annual rate with a term in months needs the months divided by 12 first.
- Day-count conventions vary. Some contracts use 365 days, others a 360-day year, which changes the interest on a short-term loan by about 1.4%.
- Simple interest growth is linear, so doubling the time doubles the interest. Compound growth is exponential, and the two diverge increasingly with time.
- A loan advertised with simple interest but repaid in instalments has a higher effective rate than the quoted one, because you do not keep the full principal for the whole term.
- This assumes the rate does not change and no payments are made during the term. Any repayment reduces the principal and therefore the interest from that point.
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 is A = P(1 + RT).
What is the difference between simple and compound interest?
Simple interest applies the rate only to the original principal, so growth is linear. Compound interest applies it to accumulated interest too, so growth is exponential and pulls ahead increasingly over time.
How much is 5% simple interest on $10,000?
$500 a year, every year. Over five years that is $2,500 of interest and a total of $12,500. The annual amount never changes, because it always applies to the original $10,000.
How do you find the rate from the interest?
Rearrange to R = I ÷ (P × T). Earning $2,500 on $10,000 over five years is 2,500 ÷ 50,000 = 0.05, which is 5% a year.
Do banks use simple or compound interest?
Savings accounts compound, usually daily or monthly. Simple interest is mostly limited to short-term loans, some car finance, bond coupons and statutory interest on judgments and late payments.
How do you calculate simple interest for months?
Divide the months by 12 to express the time in years. Six months at 5% on $10,000 is 10,000 × 0.05 × 0.5 = $250.
Sources and review
- Compound interest calculator — U.S. Securities and Exchange Commission
Last reviewed .