Calculate simple interest for short-term loans, savings, and investments. Also calculates daily interest accrual.
| Item | Value |
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Simple interest calculates interest only on the original principal — the interest earned does not itself earn further interest. While less common than compound interest in modern finance, simple interest is used for short-term loans, some personal loan products, and certain bond coupon calculations.
| Scenario | Simple Interest | Compound Interest (annual) | Difference |
|---|---|---|---|
| $5,000 at 6% for 1 year | $300 | $300 | $0 |
| $5,000 at 6% for 5 years | $1,500 | $1,691 | +$191 |
| $5,000 at 6% for 10 years | $3,000 | $3,954 | +$954 |
| $5,000 at 6% for 20 years | $6,000 | $10,036 | +$4,036 |
Over 1 year, simple and compound interest produce identical results. The difference grows with time — over 20 years, compound interest produces $4,036 more on the same $5,000 at the same rate.
What is the simple interest formula?
Simple Interest = P × r × t, where P is the principal amount, r is the annual interest rate as a decimal (e.g. 6% = 0.06), and t is time in years. The total amount including interest is A = P + I = P × (1 + r × t). For example: $5,000 at 6% for 3 years: I = $5,000 × 0.06 × 3 = $900. Total = $5,900.
What is the difference between simple and compound interest?
Simple interest calculates only on the original principal — interest never earns further interest. Compound interest calculates on principal plus accumulated interest, producing exponential growth. After 1 year they are identical; after 5 years at 6%, compound interest earns $191 more on $5,000; after 20 years, over $4,000 more.
Is simple interest better or worse for borrowers?
For borrowers, simple interest is generally better — you pay less total interest than compound interest at the same rate over the same period. For savers and investors, compound interest is better — your money grows faster. When borrowing, always check whether the lender uses simple or compound interest in their calculations.