How to calculate simple interest
- Enter the Amount borrowed or invested.
- Enter the yearly Interest rate and the Time in years. For months, divide by 12: 6 months is 0.5.
- Read the interest, the total with interest, and what yearly compounding would have earned instead.
Where simple interest is used
Simple interest shows up wherever interest is paid out instead of added to the balance. Some savings bonds and certificates pay interest to you each year, so the amount earning interest never grows. Short-term loans between people and most textbook exercises use it too, and interest on overdue invoices is often charged as simple interest for the days the bill is late.
Most savings accounts, credit cards and investments compound, so use the compound interest calculator for those.
How the gap grows over time
Over a few years the two methods are close. Over longer periods compounding pulls ahead because interest starts earning interest. On 5,000 at 4%:
| Time | Simple interest | Compounded yearly |
|---|---|---|
| 3 years | 600.00 | 624.32 |
| 20 years | 4,000.00 | 5,955.62 |
For less than a year the order flips: on 2,000 at 6% for half a year, simple interest is 60.00 and yearly compounding gives 59.13, because half a year of compounding at 6% grows the money by the square root of 1.06, which is just under 3%.