Simple Interest Calculator

What is Simple Interest?

Simple interest is a way of calculating the interest generated on an initial amount of money, known as principal, over a specified period of time. It is one of the simplest and most straightforward methods to calculate interest, as it does not take into account the accumulated interest from previous periods. This type of interest is commonly used in short-term loans and deposits.

How is Simple Interest Calculated?

Simple interest is calculated using the following formula:

Where:

• Ci is the initial capital (or principal)
• r is the annual interest rate (in decimal form)
• t is the time the money is invested or loaned, expressed in years

To convert the percentage interest rate to a decimal, simply divide it by 100. For example, a rate of 5% becomes 0.05.

Example of Simple Interest

Suppose you invest $1000 at an annual interest rate of 5% for a period of 3 years. Using the simple interest formula:

Therefore, at the end of 3 years, you will have earned $150 in interest. The total amount, including the principal and interest, would be $1150.

What is the Difference Between Simple and Compound Interest?

The main difference between simple and compound interest lies in how the interest is calculated and accumulated:

• Simple Interest: It is calculated only on the principal amount. The interest earned in previous periods is not added to the principal for the calculation of interest in future periods.
• Compound Interest: It is calculated on the principal amount and also on the accumulated interest from previous periods. This means that each period, the interest is calculated on a larger amount, resulting in faster growth of the invested capital or owed amount.

For example, if you invest $1000 at an annual rate of 5% for 3 years, compound interest would be calculated as follows:

In this example, compound interest generates more interest ($157.63) compared to simple interest ($150) at the end of the 3 years.