# How to Calculate Simple Interest Step-by-Step

Calculating simple interest can seem complicated at first, but it’s actually quite straightforward once you know the formula. In this comprehensive guide, I’ll walk you through everything you need to know to calculate simple interest accurately every time

## What is Simple Interest?

Before diving into the calculation, it’s important to understand what simple interest is.

Simple interest is a way of calculating the interest owed on a loan or earned on a deposit based solely on the principal amount, interest rate, and time. It does not take into account compounding, meaning interest does not accumulate interest over time.

Here is the simple interest formula:

Interest = Principal x Rate x Time

• Principal is the amount of money originally deposited or borrowed.

• Rate is the annual interest rate expressed as a decimal.

• Time is the length of time the money is deposited or borrowed for, expressed in years.

For example, if you borrowed \$1,000 at an interest rate of 5% for 2 years, the interest owed would be:

Interest = \$1,000 x 0.05 x 2 = \$100

So the total amount you would repay after 2 years would be the original \$1,000 principal plus the \$100 interest, equaling \$1,100.

Simple interest is usually used for short-term loans or savings accounts, where compounding does not make a significant difference in the total interest earned or owed.

## Step 1: Identify the Principal Amount

The first step in calculating simple interest is identifying the principal amount. This is the initial deposit or loan amount before any interest is applied.

For savings accounts, the principal is the starting deposit. So if you deposit \$5,000 into a savings account, the principal amount is \$5,000.

For loans, the principal is the amount initially borrowed. So if you take out a \$20,000 auto loan, the principal amount is \$20,000.

## Step 2: Identify the Interest Rate

Next, you need to know the interest rate that will be applied. Interest rates are usually expressed as a percentage, like 5%.

However, in the simple interest formula, you need to express the interest rate as a decimal. Here is how to convert:

• 5% interest is 0.05
• 3.5% interest is 0.035
• 2.25% interest is 0.0225

So if you have a savings account with a 2.5% interest rate, you would convert that to 0.025 to use in the simple interest formula.

## Step 3: Identify the Time Period

The time period refers to the amount of time the principal is deposited or borrowed for. For savings accounts, it is the length of time you keep the money deposited. For loans, it is the loan term.

Time should be expressed in years or fractions of years.

• 1 year
• 6 months = 0.5 years
• 3 months = 0.25 years
• 1 month = 0.0833 years

So if you borrowed \$5,000 on a 2-year auto loan, the time period for calculating interest would be 2 years.

## Step 4: Plug the Variables into the Formula

Now that you’ve identified the principal amount, interest rate, and time period, plug those variables into the simple interest formula:

Interest = Principal x Rate x Time

Let’s say you deposit \$10,000 into a savings account with a 4% interest rate, and you keep it there for 5 years. Here is how you would calculate the interest:

• Principal = \$10,000
• Rate = 0.04 (4% converted to decimal)
• Time = 5 years

Plugging this into the formula:

Interest = \$10,000 x 0.04 x 5 = \$2,000

So you would earn \$2,000 in simple interest over the 5 year period.

## Step 5: Calculate the Total Future Value

At this point, you’ve calculated just the interest amount. To find the total future value of the investment or loan, meaning how much will be owed or deposited after the interest is applied, you just need to add the principal and interest together.

Using the previous example where you earned \$2,000 interest on your \$10,000 deposit:

• Principal = \$10,000
• Interest = \$2,000
• Total Future Value = \$10,000 + \$2,000 = \$12,000

So after 5 years, your total balance including interest would be \$12,000.

This formula works the same for loans – just add the principal borrowed to the interest owed to get the total future payoff amount.

## Examples of Calculating Simple Interest

Let’s look at a few more examples to see simple interest calculations in action:

Example 1: Savings Account

• Deposit: \$5,000
• Interest Rate: 1.5%
• Time: 2 years

First, convert the interest rate to a decimal: 1.5% = 0.015

Now plug into the formula:

• Interest = \$5,000 x 0.015 x 2 = \$150

So you would earn \$150 in simple interest on this 2-year savings account.

• Principal = \$5,000
• Interest = \$150
• Total Future Value = \$5,000 + \$150 = \$5,150

After 2 years, your balance would be \$5,150.

Example 2: Short-Term Loan

• Principal: \$1,500
• Interest Rate: 7%
• Time: 9 months

Convert the interest rate to a decimal:

7% = 0.07

Now calculate the interest owed:

• Interest = \$1,500 x 0.07 x (9/12) = \$87.50

Since it’s a 9 month loan, we convert that to 0.75 years.

Therefore, the total amount you would repay is:

• Principal = \$1,500
• Interest = \$87.50
• Total Owed = \$1,500 + \$87.50 = \$1,587.50

So the total payoff on this 9 month, \$1,500 loan at 7% interest is \$1,587.50.

## The Simple Interest Formula Recap

Let’s quickly recap the simple interest formula:

Interest = Principal x Rate x Time

To accurately calculate simple interest, you need:

• The initial principal amount deposited or borrowed

• The interest rate as a decimal, not a percentage

• The time length in years

Then plug those values into the formula, solve for interest, and add interest earned or owed to the principal to get the total future balance.

## Comparing Simple Interest vs. Compound Interest

Simple interest calculations only take into account the original principal amount. Compound interest calculations factor in interest accumulating on interest over time.

Over long time periods, compound interest earns significantly higher returns than simple interest.

For example, say you deposit \$10,000 at a 6% annual interest rate. Here is how much interest you would earn with simple interest vs. compound interest:

Years Simple Interest Compound Interest
1 \$600 \$600
5 \$3,000 \$3,382
10 \$6,000 \$7,908
20 \$12,000 \$19,662

As you can see, the difference really starts compounding over longer terms!

However, for short-term loans or savings, simple interest is often used since there is less impact from compounding.

## When to Use the Simple Interest Formula

Here are a few examples of when simple interest calculations come in handy:

• Calculating interest owed on short-term personal loans or payday loans
• Figuring out interest earned on certificates of deposit (CDs) under 5 years
• Estimating interest earned on savings accounts
• Computing interest owed on credit cards or other lines of credit
• Getting a quick approximation of interest due on a loan

Anytime you need to calculate interest without compounding on a short time period, simple interest does the trick.

## Quick Tips for Simple Interest Calculations

Here are a few tips to keep in mind when using simple interest formulas:

• Be sure to convert percentage interest rates to decimals – this is easy to forget!

• For loans or CDs under 1 year, pay close attention to time units like months or days and convert to the proper fraction of a year.

• Remember that simple interest does not compound over time. Use compound interest formulas for long-term savings or loans when higher accuracy is important.

• Double check your time inputs – it’s easy to miscalculate years vs. months. Slow down and walk through it step-by-step.

With this comprehensive guide, you now have all the knowledge you need to calculate simple interest accurately like a pro. Just take it slow, pay close attention to the time units, convert percentages to decimals, and plug the numbers into the formula. Before you know it, calculating simple interest will be a breeze.

### What is Simple Interest?

Interest is the cost you pay to borrow money or the compensation you receive for lending money. 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).

Simple interest is interest that is only calculated on the initial sum (the “principal”) borrowed or deposited. Generally, simple interest is set as a fixed percentage for the duration of a loan. No matter how often simple interest is calculated, it only applies to this original principal amount. In other words, future interest payments wont be affected by previously accrued interest.

The basic simple interest formula looks like this:

Simple Interest = Principal Amount × Interest Rate × Time

Our calculator will compute any of these variables given the other inputs.

You may also see the simple interest formula written as:

In this formula:

• I = Total simple interest
• P = Principal amount or the original balance
• r = Annual interest rate
• t = Loan term in years

Under this formula, you can manipulate “t” to calculate interest according to the actual period. For instance, if you wanted to calculate interest over six months, your “t” value would equal 0.5.

You may also see the simple interest formula written as:

In this formula:

• I = total interest
• P = Principal amount
• r = interest rate per period
• n = number of periods

Under this formula, you can calculate simple interest taken over different frequencies, like daily or monthly. 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.

Lets review a quick example of both I=Prt and I=Prn.

I = Prt

For example, lets say you take out a \$10,000 loan at 5% annual simple interest to repay over five years. You want to know your total interest payment for the entire loan.

To start, youd multiply your principal by your annual interest rate, or \$10,000 × 0.05 = \$500.

Then, youd multiply this value by the number of years on the loan, or \$500 × 5 = \$2,500.

Now that you know your total interest, you can use this value to determine your total loan repayment required. (\$10,000 + \$2,500 = \$12,500.) You can also divide the value to determine how much interest youd pay daily or monthly.

I = Prn

Alternatively, you can use the simple interest formula I=Prn if you have the interest rate per month.

If you had a monthly rate of 5% and youd like to calculate the interest for one year, your total interest would be \$10,000 × 0.05 × 12 = \$6,000. The total loan repayment required would be \$10,000 + \$6,000 = \$16,000.

### What Financial Instruments Use Simple Interest?

Simple interest works in your favor as a borrower, since youre only paying interest on the original balance. That contrasts with compound interest, where you also pay interest on any accumulated interest. You may see simple interest on short-term loans.

For this same reason, simple interest does not work in your favor as a lender or investor. Investing in assets that dont offer compound growth means you may miss out on potential growth.

However, some assets use simple interest for simplicity — for example bonds that pay an interest coupon. Investments may also offer a simple interest return as a dividend. To take advantage of compounding you would need to reinvest the dividends as added principal.

By contrast, most checking and savings accounts, as well as credit cards, operate using compound interest.

## Simple Interest Formula

What is simple interest calculator?

Simple Interest Calculator is a open source you can Download zip and edit as per you need. If you want more latest javascript projects here. This is simple and basic level small project for learning purpose. Also you can modified this system as per your requriments and develop a perfect advance level project.

How do you calculate interest & principal?

If you wish to calculate a figure for interest AND principal, the formula for this is A = P (1 + rt), where P is the initial principal, r is the interest rate and t is the time period. Let’s say that we want to lend a friend \$5,000 at a yearly interest rate of 5% over 4 years. Your calculation might look like this: P = 5000.

How do I calculate compound interest?

So, if you’re looking to work out compound interest, you should use our compound interest calculator instead. If you wish to calculate a figure for interest AND principal, the formula for this is A = P (1 + rt), where P is the initial principal, r is the interest rate and t is the time period.