What simple interest means
With simple interest the charge each period is a fixed slice of the original principal. Interest earned last year does not itself earn interest, so the balance rises by the same dollar amount every year. That makes simple interest easy to check by hand and is why it is used for short-term notes and for loans that accrue daily on whatever balance is outstanding.
The formula
I = P × r × t A = P + I = P (1 + r t) P = principal, r = annual rate as a decimal, t = time in years t = months / 12 or days / 365 (or 360)
Worked example
Lend $5,000 at 4.5% simple interest for 3 years: I = 5,000 × 0.045 × 3 = $675, and the amount repaid is $5,675.
Going the other way: if $5,000 earned $675 over 3 years, the rate was 675 / (5,000 × 3) = 0.045 = 4.5%.
For 90 days on a 360-day basis: 5,000 × 0.045 × 90 / 360 = $56.25; on a 365-day basis it is $55.48.
Limitations
- This assumes the principal does not change. On an amortizing loan the balance falls with each payment, so interest is lower each month — use the loan or amortization calculator for that.
- It ignores fees and taxes on interest income.
- Results are rounded to the cent; the rate is shown to four decimals when solved.
Sources: Consumer Financial Protection Bureau, How interest is charged on installment loans; TreasuryDirect, Treasury Bills.
Frequently asked questions
What is the difference between simple and compound interest?
Simple interest is charged only on the original principal, so it grows in a straight line. Compound interest is also charged on interest already earned, so it grows faster over time. $5,000 at 4.5% for 10 years earns $2,250 simple interest but $2,765 compounded annually.
Where is simple interest actually used?
Many auto loans and personal installment loans accrue simple interest daily on the outstanding balance, as do U.S. Treasury bills (on a discount basis), certificates that pay interest out rather than reinvesting it, and short-term business notes. Credit cards and savings accounts compound.
What is a 360-day vs. 365-day year?
When time is entered in days, interest = P × r × days / basis. Banks and commercial loans often use a 360-day "banker's year", which produces slightly more interest than a 365-day year for the same rate. Choose the basis your agreement states.
Can I find the rate or time instead?
Yes. Choose what to solve for. The calculator rearranges I = P × r × t: rate = I / (P × t), time = I / (P × r), principal = I / (r × t).
CalcNest results are estimates based on the inputs and assumptions above, not financial, tax or lending advice. A lender's official Loan Estimate or your account statement is the final word.