How to calculate simple interest
Simple interest is the easiest type of interest to work out. Multiply the principal (the starting amount) by the annual interest rate as a decimal, then by the number of years. The formula is Interest = Principal × Rate × Time. Add the interest to the principal to get the final amount. Unlike compound interest, simple interest is only ever calculated on the original principal, never on interest already earned.
When is simple interest used?
Simple interest appears on some short-term loans, car loans, and certain bonds. For savings and most long-term investments, compound interest is more common — and grows your money faster.
Frequently asked questions
What is 5% simple interest on $5,000 for 3 years?
$5,000 × 0.05 × 3 = $750 interest, for a final amount of $5,750.
How is this different from compound interest?
Compound interest also earns interest on past interest, so over time it produces more than simple interest at the same rate.
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