Understanding Simple Interest
Our Simple Interest Calculator helps you quickly estimate interest on loans or investments.
What is Simple Interest?
Simple interest is a quick and easy method of calculating the interest charge on a loan or investment. It is determined by multiplying the principal amount by the interest rate and the time period. Unlike compound interest, simple interest is only calculated on the original principal amount.
This means the interest earned (or paid) each period remains constant throughout the duration of the loan or investment, assuming the principal and rate do not change.
How Simple Interest is Calculated
The formula for simple interest is straightforward:
$$SI = P \times R \times T$$
Where:
- $SI$ = Simple Interest
- $P$ = Principal Amount (the original amount borrowed or invested)
- $R$ = Annual Interest Rate (as a decimal)
- $T$ = Time Period (in years)
To find the total future value (A), you add the simple interest to the principal:
$$A = P + SI$$
Or, by substituting the SI formula:
$$A = P (1 + RT)$$
Simple vs. Compound Interest
The main difference between simple and compound interest lies in how the interest is calculated:
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Simple Interest:Interest is only calculated on the original principal amount. The interest earned does not become part of the principal for future interest calculations.
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Compound Interest:Interest is calculated on the principal amount and also on the accumulated interest from previous periods ("interest on interest"). This leads to exponential growth over time.
For long-term investments, compound interest generally leads to significantly higher returns than simple interest due to its exponential nature.