Saving & investing
Simple interest: Definition, Formula and Example
Simple interest is interest calculated on principal without adding prior interest to the interest-bearing amount.
Scope: General financial concept; examples are hypothetical.
Other names and related labels: Noncompounding interest.
How it works
For an unchanged principal and rate, interest grows in proportion to elapsed time. If loan principal changes after payments, simple interest may instead accrue daily on the remaining principal. A one-deposit illustration is not a full repayment schedule.
Interest = principal × annual rate × years; ending amount = principal + interest
Use a decimal rate and matching time units. Daily loan calculations also need the contract’s day-count convention.
$2,000 at 5% for three years
Hold the principal unchanged and use an annual simple rate of 5%.
- Interest: $2,000 × 0.05 × 3 = $300.
- Ending amount: $2,000 + $300 = $2,300.
Simple interest is $300; the ending amount is $2,300.
No deposits, repayments, fees, taxes or capitalization; three years.
Try these example inputsSimple interest is not the same as a flat-rate loan quote
An amortizing loan’s outstanding balance falls with principal repayments. Applying the original principal for the entire loan term can overstate its interest. Check whether a quoted rate is on a declining balance, a flat balance or an APR.
Explore with a calculator
- Simple Interest Calculator
Calculate fixed-principal simple interest with explicit rate and time units.
- Interest Rate Calculator
Solve an interest-rate assumption; review its compounding basis.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
Calculation methodology and review status · All glossary terms