Simple Interest Calculator
Calculate the interest earned and the future value of an investment using simple interest by entering the principal, rate, and time below.
Future Value using Simple Interest:
| Total Value: | $1,325.00
|
| Total Interest: | $325.00
|
Balance by Year
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Joseph Rich holds a Bachelor's degree in economics and Master's degree in finance, and specializes in economics and investing analysis.
How to Calculate Simple Interest
Simple interest is a method for calculating interest on a loan. A simple interest calculator provides a quick and easy way to calculate the interest on a loan given the present value, interest rate, and number of time periods.
Simple interest differs from compounding interest in that interest is not paid on prior interest. Interest is only paid on the principal value, so the interest paid from simple interest should be slightly less than interest paid using a compounding interest calculator or future value calculator.
An interest calculator will show you the difference between simple interest and compounding interest.
Simple Interest Formula
The simple interest formula is as follows:
A = PV × (1 + (r × t))
where:
PV = present value
r = interest rate
t = number of periods
Note that this simple interest formula can be rewritten as follows to calculate the same result:
A = PV + (PV × r × t)
This new formula breaks out the amount borrowed/lent (PV) from the interest paid/received (PV × r × t).
When is Simple Interest Used?
Simple interest can be used on loans and bonds. Loans that include simple interest include mortgages, credit cards, and student loans, to name a few.
Additionally, if you purchase bonds from the government or a corporation, you will receive simple interest.
A savings account is an example of when simple interest is not used. Assuming you leave prior interest payments in the account, you will receive interest on the original value plus the prior interest payments. This is compounding interest.
Simple interest is used when you pay back a loan because you only pay interest on the current value of the loan, not the previous interest that has accrued. Another example of simple interest is when you lend money to the government–you receive interest only on the original amount invested, and not on each previous interest payment you have received.
Examples
Let’s look at two examples that would use a simple interest loan calculator, one in which the individual is the borrower and one in which the individual is the lender.
For example, let’s say you needed to borrow $10,000 on a personal loan at a rate of 5% for 5 years.
Using the simple interest formula above, you would need to pay back a total of $12,500 ($10,000 in principal and $2,500 in interest).
$10,000 + ($10,000 × 5% × 5 years)
$10,000 + $2,500
$12,500
Now, on the other hand, let’s say you purchased $8,000 in bonds paying 3% interest over 10 years.
The bonds would pay you $2,400 in interest over the 10 years. Add to it the $8,000 you initially invested, and you would receive $10,400 total.
Let’s plug the numbers back into the simple interest formula:
$8,000 + ($8,000 × 3% × 10 years)
$8,000 + $2,400
$10,400
Use our bond yield calculator to learn more about how much bonds yield over time.
While compounding interest uses prior interest payments to calculate interest, simple interest only uses the current principal value to calculate a period’s interest payment.
The simple interest calculator and the simple interest formula are the easiest ways to calculate how much interest will be paid or received.