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You may see simple interest on short-term loans.įor this same reason, simple interest does not work in your favor as a lender or investor. That contrasts with compound interest, where you also pay interest on any accumulated interest. Simple interest works in your favor as a borrower, since you're only paying interest on the original balance. What Financial Instruments Use Simple Interest? If you had a monthly rate of 5% and you'd like to calculate the interest for one year, your total interest would be $10,000 × 0.05 × 12 = $6,000. ($10,000 + $2,500 = $12,500.) You can also divide the value to determine how much interest you'd pay daily or monthly.Īlternatively, you can use the simple interest formula I=Prn if you have the interest rate per month. Now that you know your total interest, you can use this value to determine your total loan repayment required. Then, you'd multiply this value by the number of years on the loan, or $500 × 5 = $2,500. To start, you'd multiply your principal by your annual interest rate, or $10,000 × 0.05 = $500. You want to know your total interest payment for the entire loan. Let's review a quick example of both I=Prt and I=Prn.įor example, let's say you take out a $10,000 loan at 5% annual simple interest to repay over five years. 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. Under this formula, you can calculate simple interest taken over different frequencies, like daily or monthly. Simple Interest for Different Frequencies For instance, if you wanted to calculate interest over six months, your "t" value would equal 0.5.

Under this formula, you can manipulate "t" to calculate interest according to the actual period.

P = Principal amount or the original balance.

You may also see the simple interest formula written as: Our calculator will compute any of these variables given the other inputs. Simple Interest = Principal Amount × Interest Rate × Time The basic simple interest formula looks like this: In other words, future interest payments won't be affected by previously accrued interest. No matter how often simple interest is calculated, it only applies to this original principal amount.

Generally, simple interest is set as a fixed percentage for the duration of a loan. Simple interest is interest that is only calculated on the initial sum (the "principal") borrowed or deposited. 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). Interest is the cost you pay to borrow money or the compensation you receive for lending money. Related Interest Calculator | Compound Interest Calculator