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How to use this calculator#
- Enter the principalThis is the original sum only — the deposit made or the amount advanced. Never add interest already accrued back into it, because that is precisely the step that turns simple interest into compound interest.
- Enter the annual rateType it as a percentage, not a decimal: 6, not 0.06. If your agreement quotes a monthly rate, multiply by 12 first — 1.5% a month is 18% a year.
- Convert the time into yearsThe field takes decimals, so 6 months is 0.5, 9 months is 0.75 and 30 months is 2.5. For day-count agreements, divide the actual days by 360 or 365 depending on the basis in the contract.
- Read the compounding comparisonThe result panel also shows what annual compounding would have produced. Over short periods the two barely differ; the gap becomes the entire story once you pass about ten years.
The formula#
Simple interest (I = PRT)
I = P × r × t and A = P + I = P(1 + r × t)
- I
- Interest earned or owed
- P
- Principal — the original amount, unchanged throughout
- r
- Annual interest rate as a decimal: 6% becomes 0.06
- t
- Time in years, expressed as a decimal
- A
- Maturity value — principal plus all interest
r and t must share a unit. A 6% annual rate over 9 months is 0.06 × 0.75, not 0.06 × 9. If a contract quotes a monthly rate, either annualise the rate or count t in months — mixing the two inflates the answer twelvefold.
The simple interest formula#
Simple interest is charged only on the original principal: I = P x r x t, where P is the principal, r is the annual rate as a decimal and t is time in years. Deposit 5,000 at 6% for 4 years and you earn 5,000 x 0.06 x 4 = 1,200, giving a maturity value of 6,200. The interest is identical every single year — 300 in year one and 300 in year four.
For periods shorter than a year, convert months into a fraction: nine months is t = 0.75. Lenders that quote a day-count convention divide the actual days by 360 or 365 instead, which is why a short-term note can report slightly different interest than the plain annual figure implies. Always check which basis your agreement uses before reconciling a statement.
Simple versus compound interest#
Compound interest pays interest on accumulated interest, so it pulls ahead the longer money sits. At 6% over four years, 5,000 grows to 6,200 under simple interest but 6,312 with annual compounding — a gap of 112. Stretch the same deposit to 30 years and simple interest returns 9,000 of interest while annual compounding returns roughly 23,700, more than two and a half times as much.
Simple interest still governs plenty of real products: most US car loans, many personal and short-term loans, certificates of deposit that pay interest out rather than reinvesting it, and treasury bills quoted on a discount basis. On a debt, simple interest is the friendlier structure, because paying early genuinely reduces what you owe rather than shrinking a balance that has already been inflated by capitalised interest.
Worked examples#
A four-year deposit
$5,000 placed at 6% simple interest for 4 years, with interest paid out rather than reinvested.
- Convert the rate: 6% = 0.06
- I = 5,000 × 0.06 × 4
- I = 300 × 4 = 1,200
- A = 5,000 + 1,200 = 6,200
- Annual compounding for comparison: 5,000 × 1.06⁴ = 6,312.38
$1,200 of interest and a $6,200 maturity value — $112.38 less than annual compounding would have paid.
A nine-month short-term note
$8,000 borrowed at 5.5% for 9 months, and what happens if the lender uses a 360-day year.
- t = 9 ÷ 12 = 0.75 years
- I = 8,000 × 0.055 × 0.75 = 330.00
- On a 365-day basis with 273 actual days: 8,000 × 0.055 × (273 ÷ 365) = 329.10
- On a 360-day basis with 273 actual days: 8,000 × 0.055 × (273 ÷ 360) = 333.67
$330.00 on the plain annual basis. The 30/360 convention charges $333.67 and actual/365 charges $329.10 — a $4.57 spread on a single small note, and far larger sums on commercial paper.
Reference tables#
| Time | 3% | 5% | 6% | 8% | 10% |
|---|---|---|---|---|---|
| 6 months | $15.00 | $25.00 | $30.00 | $40.00 | $50.00 |
| 1 year | $30.00 | $50.00 | $60.00 | $80.00 | $100.00 |
| 2 years | $60.00 | $100.00 | $120.00 | $160.00 | $200.00 |
| 3 years | $90.00 | $150.00 | $180.00 | $240.00 | $300.00 |
| 5 years | $150.00 | $250.00 | $300.00 | $400.00 | $500.00 |
| 10 years | $300.00 | $500.00 | $600.00 | $800.00 | $1,000.00 |
Simple interest is perfectly linear in both rate and time, which is why this grid works by multiplication and a compound-interest grid does not.
| Years | Simple interest | Simple total | Compound interest | Compound total | Gap |
|---|---|---|---|---|---|
| 1 | $300.00 | $5,300.00 | $300.00 | $5,300.00 | $0.00 |
| 2 | $600.00 | $5,600.00 | $618.00 | $5,618.00 | $18.00 |
| 4 | $1,200.00 | $6,200.00 | $1,312.38 | $6,312.38 | $112.38 |
| 10 | $3,000.00 | $8,000.00 | $3,954.24 | $8,954.24 | $954.24 |
| 20 | $6,000.00 | $11,000.00 | $11,035.68 | $16,035.68 | $5,035.68 |
| 30 | $9,000.00 | $14,000.00 | $23,717.46 | $28,717.46 | $14,717.46 |
The two are identical in year one and differ by 2.6 times over thirty years. On a deposit you want compounding; on a debt you want simple interest.
| Period | t (years) |
|---|---|
| 1 month | 0.0833 |
| 3 months | 0.25 |
| 6 months | 0.5 |
| 9 months | 0.75 |
| 18 months | 1.5 |
| 30 months | 2.5 |
For an exact day count, use days ÷ 365 (or ÷ 360 if the agreement specifies a 30/360 basis).
Common mistakes#
- Entering the rate as a decimalTyping 0.06 into a percentage field asks for 0.06%, which returns $12 on $5,000 over 4 years instead of $1,200. It is a factor-of-100 error and it is by far the most common one on this page.
- Multiplying by months instead of yearsI = 8,000 × 0.055 × 9 gives $3,960 for a nine-month note that actually costs $330. Either divide the months by 12 or divide the rate by 12 — do one, never both, never neither.
- Applying simple interest to a credit card or savings accountCards compound daily on the average daily balance and savings accounts credit interest monthly or annually. Using I = PRT on either understates a card debt and understates a long-term deposit, in both cases by a widening margin.
- Ignoring the day-count basis on short-term instrumentsMoney-market paper, many commercial loans and most treasury bills specify actual/360, actual/365 or 30/360. A 30/360 basis charges about 1.4% more interest than actual/365 for the same nominal rate, which is why reconciliations fail by a few dollars and nobody can find them.
Frequently asked questions#
Is simple interest better for a borrower?
Usually yes. You only pay interest on the outstanding principal, and paying early reduces the balance immediately. Compound interest on a debt charges interest on unpaid interest, so the amount owed grows faster.
How do I convert months into years?
Divide the months by 12 — six months is 0.5 years and 18 months is 1.5. This calculator accepts decimals, so you can type the fraction directly.
Does simple interest apply to credit cards?
No. Cards typically compound daily on the average daily balance, so unpaid interest starts earning interest of its own. Use a credit card payoff calculator for those balances.
What is maturity value?
The principal plus all interest accrued — the total you receive when a deposit matures, or the total you hand back when a loan is settled.
Key terms#
- Principal
- The original amount lent, borrowed or deposited. Under simple interest it never changes.
- Maturity value
- Principal plus all accrued interest — the total handed over when the deposit matures or the loan is settled.
- Day-count convention
- The rule for converting a period into a fraction of a year: actual/365, actual/360 or 30/360. It changes the interest on short-dated instruments by roughly 1–2%.
- Accrued interest
- Interest earned but not yet paid. Under simple interest it sits outside the principal, which is exactly why it never earns interest of its own.
- Nominal rate
- The stated annual percentage before any compounding is applied. For a genuinely simple-interest product, the nominal rate is also the effective rate.
Sources#
- How does compound interest work? (the contrast with simple interest) — Consumer Financial Protection Bureau
- Interest rate basics for investors — U.S. Securities and Exchange Commission (Investor.gov)
- Treasury bills: rates and how discount pricing works — U.S. Department of the Treasury — TreasuryDirect
Figures last checked .
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