Most loans and savings accounts on earth are priced with either simple interest or compound interest, and the difference between the two is the difference between paying (or earning) a predictable, flat fee and a snowballing one. This simple interest calculator isolates the flat version: given a principal P, an annual rate r, and a time t in years, it tells you exactly how much interest accrues, what the total payoff amount looks like, and what the equivalent monthly payment would be if you paid it back in equal installments.
Simple interest never charges interest on interest. That makes it the easiest formula in all of finance to explain, to audit, and to plan around — which is why auto loans, many personal loans, some student loans, and short-term FD-insured CDs still price themselves with it.
How to Use
- Enter the Principal (P) — the amount you borrow or deposit. On a car loan this is the negotiated price minus your down payment; on a savings product it is the lump sum you hand over.
- Set the Annual Interest Rate (r) as a percentage. A 5% APR goes in as
5, not0.05. If you only have a monthly rate, multiply it by 12 first. - Enter the Time (t) in years. The field accepts decimals, so 18 months goes in as
1.5, and 90 days (roughly a quarter) goes in as0.25. - Read the result card: Interest Earned is the flat fee, Total Amount is principal plus interest, and Monthly Payment spreads that total evenly across the months.
Every figure updates as you type. There are no compounding switches, no balloon dates, and no amortization schedule — by design, because simple interest does not need any of those.
The Simple Interest Formula
The whole model is one line of middle-school arithmetic:
I = P × r × t
Where:
- I is the interest earned or owed.
- P is the principal — the starting balance.
- r is the annual interest rate in decimal form (so a 5% APR becomes 0.05).
- t is the time in years.
The total amount owed at the end of the term is simply A = P + I, and if you spread that total across equal monthly payments you get monthly = A ÷ (t × 12).
Worked example on $5,000 at 5% for 3 years: I = 5,000 × 0.05 × 3 = $750, A = 5,000 + 750 = $5,750, and the monthly equivalent is 5,750 ÷ 36 = $159.72. Notice that the interest never compounds: year one charges $250, year two charges another $250, and year three charges another $250. Each year's interest is always calculated on the original $5,000, never on the growing balance.
That is the single sentence that separates simple interest from compound interest. Compound interest would charge year-two interest on the original $5,000 plus the $250 already accrued, which is why compound balances grow faster than a straight line.
When Simple Interest Is Used
Despite compound interest being the default for mortgages, credit cards, and brokerage returns, simple interest still shows up in very specific corners of consumer finance:
- Auto loans — most bank and captive-company car loans are simple-interest contracts. The daily interest accrues on the current principal, so paying early within the billing cycle shaves a few days of interest off.
- Short-term personal loans — many installment lenders advertise a flat "interest fee" that is just P × r × t.
- Some student loans — federal unsubsidized loans accrue daily simple interest; the Department of Education publishes the exact formula.
- Certificates of deposit (CDs) — when the bank pays interest at maturity rather than reinvesting it, the payout is simple interest on the deposit.
- Private promissory notes and family loans — a handshake loan between relatives almost always uses P × r × t because it is auditable on the back of an envelope.
If you are ever quoted a "flat rate" on a loan, ask whether it is simple. A flat rate calculated on the original principal for the whole term is simple interest; a flat rate that already amortizes into a monthly payment is a different animal.
Examples
Example 1 — The textbook problem. You borrow $5,000 at 5% per year for 3 years. Interest is $5,000 × 0.05 × 3 = $750, the total you repay is $5,750, and spreading that over 36 months gives $159.72 per month. This is the canonical textbook example used in every high-school algebra book.
Example 2 — A $100,000 equipment loan. A small business borrows $100,000 at 6% for 5 years. Interest = 100,000 × 0.06 × 5 = $30,000, total = $130,000, and the monthly payment over 60 months is $2,166.67. Compare that to the same loan compounded monthly: the compounded interest would come out closer to $34,900, so the simple contract saves the business roughly $4,900.
Example 3 — A seven-figure warehouse line. On a $1,000,000 short-term note at 4% for 5 years, simple interest charges $200,000 and the total payoff is $1,200,000, or $20,000 per month over 60 months. Running this number before signing a commercial note tells you immediately whether the quoted rate is being calculated on the original principal (simple) or on a compounding schedule.
FAQ
What is the simple interest formula?
Simple interest is I = P × r × t, where P is the principal, r is the annual interest rate in decimal form, and t is the time in years. The total amount to repay or withdraw is A = P + I. It is the same formula taught in introductory algebra and used by auto lenders, the federal student-aid system, and most short-term promissory notes.
How is simple interest different from compound interest?
Simple interest is calculated only on the original principal, so each period's interest is identical. Compound interest is calculated on the principal plus any interest that has already accrued, so the interest itself earns interest. Over a long horizon the gap is dramatic: $10,000 at 7% for 30 years earns $21,000 in simple interest but roughly $76,123 in compound interest.
Do car loans use simple interest?
Yes. The vast majority of auto loans in the United States are simple-interest contracts. Interest accrues daily on the current principal balance, so an early payment within the billing period pays down more principal and slightly less interest than a late one. The monthly payment itself is fixed, but the split between principal and interest shifts as you pay.
How do I calculate monthly payments on a simple interest loan?
First compute the total amount A = P × (1 + r × t), then divide by the number of months: monthly = A ÷ (t × 12). On a $5,000 loan at 5% for 3 years, that is $5,750 ÷ 36 = $159.72 per month. Note that this is an equal-installment spread of a simple-interest total; a true amortizing loan uses a different formula (the PMT annuity equation) and usually charges compound interest.
Is simple interest good or bad for borrowers?
It is almost always good for borrowers, because no interest-on-interest accrues. A $20,000 car loan at 6% for 5 years costs $6,000 in simple interest; the same balance compounded annually would cost closer to $6,800. The trade-off is that simple-interest loans are usually short (under 7 years), so the monthly payment is higher than a comparable long amortizing mortgage.
Is simple interest good or bad for savers?
It is bad for savers over the long run. A savings account that pays simple interest does not grow on the interest it has already paid out; a high-yield savings account or CD that compounds monthly grows faster. Use this calculator to see the floor — the minimum interest you should expect — and then compare it against a compound-interest calculator to see the upside.
What happens when the interest rate is zero?
The formula still works: I = P × 0 × t = $0, and the total amount equals the principal. The monthly payment is just P ÷ (t × 12), which is the same as splitting the principal evenly across the months. This is the fallback lenders use for 0% APR promotions on cars and store cards.
Disclaimer
This simple interest calculator is provided for informational purposes only and does not constitute financial, lending, tax, or investment advice. Estimates use the standard I = P × r × t formula with the inputs you enter; actual loan or savings offers vary by lender, institution, credit profile, compounding convention, and fees. Always confirm the exact interest method (simple vs. compound), the accrual basis (daily, monthly, annual), and the total payoff figure directly with your lender or bank before signing any agreement.