Simple Interest Calculator

Simple interest is the most basic way of pricing the use of money: a fixed percentage of the original amount is charged for every period that passes, and that percentage never changes even as time goes on. Nothing about the calculation looks at how much interest has already accrued — only the original principal ever earns or costs anything. That single restriction is what makes the growth of a simple-interest balance perfectly linear rather than curved.

The distinction between simple and compound interest comes down to one question: does interest itself earn interest? Under simple interest, the answer is no — the interest calculated in month one has no effect on the interest calculated in month two, because both are based on the same unchanging principal. Under compound interest, each period’s interest is added to the balance before the next period’s interest is calculated, so the amount being charged grows a little larger every time.

Over short periods the difference is small. Over long ones it becomes substantial, because compounding is an exponential process while simple interest stays a straight line — this is why almost every long-term savings or investment product compounds, while simple interest survives mainly in short-duration or specialised instruments.

Despite compounding being the default almost everywhere else in finance, simple interest persists in a handful of specific corners:

Some lenders quote a loan using a flat, simple-interest rate applied to the original amount borrowed for the full term — even though the borrower has been paying the balance down all along. Because interest keeps being charged on the full original amount rather than the shrinking balance, the true annualised cost of a flat-rate loan works out considerably higher than the quoted rate suggests. Comparing loans fairly means converting a flat rate to its equivalent annual percentage rate on a reducing balance, not comparing the headline percentages directly.