Simple Interest Formula: How to Calculate It (I = P × r × t)
Learn the simple interest formula, solve for interest, principal, rate or time, compare 365 and 360-day counts and compounding, with a free calculator.
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Free tool: Simple Interest CalculatorSimple interest is interest paid only on the original amount, never on interest already earned. It's used for many car loans, some personal loans, short-term notes, bonds' coupon payments and classroom finance problems. This guide explains the formula, shows how to rearrange it to find any missing value, and compares it with compound interest, using the free Simple Interest Calculator.
The simple interest formula
Interest = Principal × Rate × Time (I = P × r × t)
with the rate as a decimal and the time in years.
Example: $10,000 at 5% for 3 years:
- Interest: 10,000 × 0.05 × 3 = $1,500
- Total: $10,000 + $1,500 = $11,500
The interest is the same $500 every year, because it's always calculated on the original $10,000.
Solving for the other values
Rearranging the formula finds whichever number is missing:
- Principal: P = I ÷ (r × t). To earn $1,500 at 5% in 3 years, you need $10,000.
- Rate: r = I ÷ (P × t). Turning $10,000 into $11,500 in 3 years is a 5% rate.
- Time: t = I ÷ (P × r). Growing $10,000 to $12,000 at 5% takes 4 years.
Days, months and the day count
For periods shorter than a year, the time is a fraction of a year, and lenders count days in one of two ways:
- 365-day count (actual/365): 90 days is 90 ÷ 365 of a year, so $10,000 at 5% earns $123.29.
- 360-day count (banker's rule): 90 days is 90 ÷ 360 = 0.25 of a year, so the same loan costs $125.00.
The 360-day convention is common for commercial loans and money markets and slightly favors the lender. Check which one your agreement uses.
Simple vs compound interest
With compound interest, interest is added to the balance and earns interest itself. Over the same 3 years at 5%:
| Simple interest | Compounded monthly | |
|---|---|---|
| Year 1 | $10,500.00 | $10,511.62 |
| Year 2 | $11,000.00 | $11,049.41 |
| Year 3 | $11,500.00 | $11,614.72 |
Compounding adds $114.72 here, and the gap widens with time and higher rates. As a borrower, simple interest is cheaper; as a saver, compounding is better. See Compound Interest Explained for the full picture.
How to use the Simple Interest Calculator
- Open the Simple Interest Calculator.
- Choose what to solve for: interest, principal, rate or time.
- Enter the known values: principal, annual interest rate, time with its unit (years, months or days), or the final amount, depending on what you're solving for.
- Choose the day count, 365 or 360, when the time is in days.
- Pick a compounding frequency to compare against.
- Read the results: the simple interest, the total amount, the compound total and the extra that compounding would add, with a growth chart.
Frequently asked questions
How do I calculate simple interest?
Multiply the principal by the annual rate (as a decimal) and the time in years. $10,000 at 5% for 3 years earns 10,000 × 0.05 × 3 = $1,500.
What's the difference between simple and compound interest?
Simple interest is calculated only on the original principal; compound interest is also calculated on interest already earned, so it grows faster over time.
Where is simple interest used?
In many auto loans and personal loans (where interest accrues daily on the remaining balance), short-term business loans, some bonds and promissory notes, and as a teaching tool for understanding interest.