Simple Interest Calculator

Simple Interest Plus Principal Calculator

The simple interest calculator allows you to determine the amount of interest you can receive or pay over the life of your loan.

This calculator comes in handy for analyzing different types of loans when determining the projected interest you get from lending money.

You can use the simple interest calculator to calculate the principal, the interest rate, or the time of interest accrual.

The Information You Need to Use the Simple Interest Calculator

You will need a few different inputs to use the simple interest formula. First, you will need the principal amount of the loan. Then you will need to know or determine the interest rate and term of the loan. This results in the interest formula A=P(1+rt). The formula includes the following components:

• A = calculated interest,
• P = loan amount,
• r = interest rate, in decimal format,
• t = loan term.

You need three of the four variables to use the calculator, so if you have A, P, and r, you can solve for t.

The Specifics of Simple Interest

Simple interest is the amount paid by a borrower for the use of borrowed money over a fixed period. It is interest only on the principal amount as a percentage of the principal amount. No interest is charged on the interest.

The simple interest rate does not increase over time, so you will always know exactly how much you will pay.

Borrowers benefit from simple interest because they only have to pay interest on the loans they take out. But investors can lose out on simple interest if their investments are based on it.

When making a payment on a simple interest loan, you pay the interest for that month first. The rest of the payment goes to repay the principal amount of the loan.

For example, you have a credit card with a 5% Annual Percentage Rate and you make $2,000 worth of purchases during that year. You would end up paying back the $2,000 you borrowed from the credit card company plus 5% interest on that $2,000. So, paying off the balance will cost you $2,100.

Differences Between Simple Interest and Compound Interest

Simple interest is calculated only on the balance of the principal debt.

And compound interest is calculated based on the principal balance and accumulated interest from previous periods. With compound interest, the amount owed will grow much faster than with simple interest.

Sometimes compound interest is called "interest on interest payments."

The growth of compound interest is affected by such a factor as the frequency of compounding, that is, the frequency of compounding. The greater the number of compound interest periods, that is, compounding periods, the higher the interest rate.

The compounding periods are a crucial element that distinguishes between simple and compound interest.

The main difference between simple and compound interest is that the amount owed on compound interest grows much faster.

The Applications of Simple Interest

Simple interest applies to credit card balances. Most personal loans, including student loans and home mortgages, use simple interest. Most coupon bonds use simple interest.

Consumer loans and auto loans use simple interest when calculating interest payments. Certificates of deposit use simple interest to calculate investment income.

Simple interest is usually applied to short-term loans, and some mortgages use this calculation method. In the U.S., most mortgages with amortization schedules are simple interest loans.

Compound interest is often used to enhance long-term investment returns, such as 401(k)s and other investments. Another everyday use of compound interest is in bank accounts, especially savings accounts. Student loans, mortgages, and credit cards can also use compound interest, so keep an eye on the interest rate when making these important financial decisions.

There are no hard rules about using simple or compound interest. So you need to ask your lender what type of interest they use.

Examples

Example 1

Jesse is considering taking out a loan to buy a car. The loan amount will be $5,000, with the bank charging 3% interest each year for five years. What total amount of interest he can expect to pay?

Calculating the interest yields the following equation:

A = $5,000 × (1 + 0.03 × 5) = $5,750

Subtracting $5,000 from the loan amount gives Jesse a total interest expense of $750.

Example 2

Anna is a student who took a simple interest loan to pay for one year of college tuition, which costs $20,000. The annual interest rate on loan is 5%. Anna repaid the loan over four years.

The amount of simple interest paid is:

$20,000 × 0.05 × 4 = $4,000

and the total repayments are:

$20,000 + $4,000 = $24,000

Solutions for different factors

We can break down the simple interest rate formula into four different formulas. Each of these formulas solves the problem for a different variable.

Calculate the total amount of interest (standard calculation)

$$A=P(1+rt)$$

Calculate the principal amount owed

$$P = \frac{A}{1 + rt}$$

Calculate the interest in decimal form

$$r = (\frac{1}{t}) × (\frac{A}{P} - 1)$$

Calculate the interest as a percentage

$$R = r × 100$$

Calculate the lending time

$$t = (\frac{1}{r}) × (\frac{A}{P} - 1)$$

Example 3

Let's try a reverse calculation to find the loan time.

Sarah takes out a $10,000 loan with an interest rate of 5%. The calculated principal and interest amount are $13,500. What is the duration of the loan?

Using the inverse calculation above, we get the formula:

$$t = \frac{1}{0.05} × \frac{13,500}{10,000} - 1$$

After solving for t, you get the loan for seven years.

Top tips to keep in mind when calculating simple interest

Check your data

Check the terms of your potential contract to make sure you enter the correct information. The simple interest calculator explains the results in detail, familiarizing you with the factors that affect the calculation.

Don't assume that interest will accrue unambiguously

The simple interest plus principal calculator gives you a general idea of the interest you can reasonably expect on your loan.

Don't automatically assume that this is the exact amount that lenders will charge you. Some factors can change from the time you get the loan until you sign it.

Some contracts charge interest based on market factors, meaning the interest rate can change over the life of the loan.

Summary

Understanding how to calculate simple interest is important for individuals and businesses.

Not all loans have a simple interest rate. Many loans accrue compound interest. When these situations arise, use our compound interest calculator designed to identify the compound interest on your loans or investments.