Simple Interest Calculator

What this tool is used for

• Checking the interest on a short-term loan that genuinely uses simple rather than compound interest.
• Working out the interest portion of a fixed repayment agreed as a flat rate.
• Comparing a simple-interest quote against a compound one over the same term.
• Producing a figure to check against a statement on a straightforward instrument.
• Teaching the difference between the two interest models with concrete numbers.

Frequently Asked Questions

What is the formula?

I = P × r × t, and the total is P(1 + rt). Interest is charged only on the original principal, never on accumulated interest — which is the single difference from compound interest and the reason the two diverge over time.

When is simple interest actually used?

Short-term instruments: many car loans, some personal loans, Treasury bills and most bond coupon payments. It also appears in statutory interest on late payments and court awards, where compounding would be contentious.

How much does it differ from compound interest?

Negligibly over one year, hugely over decades. £10,000 at 5% for 30 years yields £15,000 of simple interest but £33,219 compounded — more than double, and the gap widens with both rate and time.

What are day-count conventions?

Rules for how a year is counted, and they change the answer. 30/360 assumes every month is 30 days; actual/365 and actual/360 use real days. Actual/360 quietly yields more interest, which is why it is common in commercial lending.

Is simple interest better for a borrower?

At the same rate, yes — you pay less. But rates are set to compensate, so a simple-interest loan often carries a higher rate. Compare the total cost, not the interest type.

Which day-count convention should I use?

Whatever the contract specifies — 30/360, actual/365 and actual/actual give materially different results on the same loan. The convention is a term of the agreement, not a modelling choice.

Why do short-term instruments use simple interest?

Because there is no intermediate period to compound over. Treasury bills, commercial paper and most invoice financing settle before a compounding date would arrive, so the simpler formula is the accurate one.

Common errors and gotchas

• Using it where interest compounds, which understates the total, increasingly so over longer terms.
• Mixing the rate period with the term period, so an annual rate is applied to a count of months.
• Ignoring fees, which often dominate the cost on short-term products.
• Assuming the quoted rate is the effective one, when the two differ as soon as compounding appears.
• Applying a full-year rate to a part-year term without prorating it.