What is Simple Interest?
Simple Interest (SI) is a method of calculating interest where the interest is computed only on the original principal amount throughout the entire loan or investment period. Unlike compound interest, simple interest doesn't add earned interest back to the principal for subsequent calculations.
This makes simple interest straightforward to calculate and commonly used for short-term loans, car financing, and some savings instruments where the duration is typically less than one year or where simplicity is preferred.
Simple Interest Formula
The formula for calculating simple interest is:
Where:
P = Principal (initial amount)
R = Rate of interest per annum (%)
T = Time period in years
Total Amount (A) = P + SI = P × (1 + RT/100)
How Simple Interest Works
With simple interest, you earn (or pay) the same amount of interest each period because the calculation is always based on the original principal:
- Calculate yearly interest: Multiply principal by rate and divide by 100.
- Multiply by years: The yearly interest stays constant, so total SI = yearly interest × time.
- Add to principal: Total amount equals principal plus accumulated interest.
Example Calculation
SI = (1,00,000 × 8 × 5) / 100
SI = 40,00,000 / 100
SI = ₹40,000
Total Amount = 1,00,000 + 40,000 = ₹1,40,000
Simple Interest vs Compound Interest
- Calculation base: SI uses only the original principal; CI includes accumulated interest.
- Growth pattern: SI grows linearly (same amount each period); CI grows exponentially.
- Total returns: CI always yields more than SI for the same rate and time (when time > 1 year).
- Complexity: SI is simpler to calculate; CI requires more complex formulas.
- Usage: SI for short-term, simple loans; CI for long-term investments and most bank deposits.
Where is Simple Interest Used?
- Car loans: Many auto loans use simple interest calculation.
- Short-term loans: Loans under one year often use simple interest.
- Consumer credit: Some store financing and personal loans.
- Treasury bills: Government short-term securities.
- Add-on interest loans: Total interest calculated upfront and added to principal.
Benefits of This Calculator
- Instant calculation: See results update in real-time as you adjust values.
- Visual breakdown: Doughnut chart shows principal vs interest earned.
- Flexible inputs: Use sliders or type exact values for precision.
- No app required: Works directly in your browser on any device.
- Privacy focused: All calculations happen locally—no data sent to servers.
Frequently Asked Questions
How do I calculate simple interest for months?
Convert months to years by dividing by 12. For example, for 6 months: T = 6/12 = 0.5 years. Then use the standard formula: SI = (P × R × 0.5) / 100.
Is simple interest better for borrowers or lenders?
Simple interest is generally better for borrowers because you pay less total interest compared to compound interest. Lenders typically prefer compound interest as it generates higher returns.
Can simple interest be negative?
No, simple interest itself cannot be negative (assuming positive principal, rate, and time). However, in some economic situations, negative interest rates exist where the "interest" paid is from lender to borrower.
How is simple interest different from flat rate interest?
They're essentially the same. "Flat rate" is another term for simple interest, commonly used in car loans and personal financing. The rate applies only to the original principal.
What's the effective annual rate with simple interest?
For simple interest, the effective annual rate equals the stated rate. There's no compounding effect, so an 8% simple interest rate means you earn exactly 8% of the principal per year.
Why do banks prefer compound interest?
Banks prefer compound interest for lending because it generates more income. For deposits, they use compound interest to attract customers, but the compounding frequency affects how much you actually earn.