$
%
Total Interest
$0
Original Principal
$0
Total Final Amount
$0
Formula / Calculation
Simple Interest = P × r × t
What is Simple Interest?
Simple interest is a quick method of calculating the interest charge on a loan or the interest accumulation on a fixed-yield investment. Unlike compound interest, simple interest is only calculated on the original principal amount, making it highly predictable for short-term personal loans.
Where Simple Interest is Used
Auto Loans
Many car loans originate using simple interest formulas, calculating your daily interest charge based solely on the remaining principal.
Personal Loans
Short-term personal loans frequently utilize simple interest to avoid crushing consumers with compounding debt.
Certificates of Deposit
Certain bonds and CDs pay out simple interest on a fixed schedule (though many reinvest it to compound).
Tips on Interest Calculations
Always ask lenders if they are charging simple or compound interest, as it heavily affects total payoff amounts.
Making extra payments on a simple interest loan reduces the principal faster, greatly lowering total interest.
If lending money, be sure to document the exact interest terms in writing.
Frequently Asked Questions
How does simple interest differ from compound interest?
Simple interest only applies to the principal. Compound interest applies to both the principal and the previously accumulated interest.