What is Simple Interest?
Simple interest is a method of calculating interest where the interest is calculated only on the original amount of money (the principal) borrowed or invested, rather than on the accumulated interest as with compound interest.
The Simple Interest Formula
I = P × r × t
- I: Interest Amount
- P: Principal (starting amount)
- r: Interest Rate (as a decimal)
- t: Time (typically in years)
- I: Interest Amount
- P: Principal (starting amount)
- r: Interest Rate (as a decimal)
- t: Time (typically in years)
Example Calculation
If you invest $1,000 for 3 years at an annual interest rate of 5%, the calculation would be:
$1,000 × 0.05 × 3 = $150 in interest.
Total amount after 3 years: $1,150.
Total amount after 3 years: $1,150.
When is Simple Interest Used?
- Short-term consumer loans (some personal loans)
- Certificates of Deposit (CDs) — though many are compound
- Interest between friends or family members
- Many bond payments