Simple interest is the most basic way to calculate the cost of borrowing or the reward for lending: a flat percentage of the original amount, per year, with no compounding.
The Simple Interest Formula
P is the principal, r the annual rate as a decimal, and t the time in years. The total value at the end is simply P + interest.
Worked Example
Lend $5,000 at 6% simple interest for 3 years: interest = 5,000 × 0.06 × 3 = $900, for a total repayment of $5,900. Under monthly compounding, the same loan would cost about $983 in interest — that gap is the entire difference between simple and compound interest.
Frequently Asked Questions
Where is simple interest actually used?
Short-term personal loans, some auto loans, bond coupon payments, late-payment penalties and many private lending agreements are quoted with simple interest.
What is the difference between simple and compound interest?
Simple interest is charged only on the original principal. Compound interest is charged on principal plus accumulated interest, so it grows faster over time.
Is simple interest better for borrowers?
Generally yes — at the same nominal rate and term, a simple-interest loan costs less because interest never earns interest.