Simple Interest Calculator
Simple Interest Calculator
Calculate interest without compounding (I = P × r × t).
Report Bug Money has a price, and that price is called Interest. Unlike Compound Interest, which can spiral out of control, Simple Interest is linear and predictable. It is calculated only on the original amount you borrowed (Principal), never on the accumulated interest. The Simple Interest Calculator is the essential tool for checking Auto Loans, short-term personal loans, and private lending agreements.
In the US, understanding this math is the key to paying off your car early and saving thousands of dollars in "Finance Charges."
🏦 The Banker's Formula (I = Prt)
The logic is straightforward: Interest equals the Principal times the Rate times the Time.
Variables Defined:
- P (Principal): The starting loan amount (e.g., $10,000).
- r (Rate): The annual interest rate as a decimal (5% = 0.05).
- t (Time): The duration of the loan in years.
🚗 Scenario: The "Used Car" Loan
You are buying a used car for $15,000. The dealership offers a 4-Year loan at a 6% Simple Interest rate. How much extra will you pay?
| FEDERAL TRUTH IN LENDING DISCLOSURE | |
|---|---|
| Amount Financed (P) | $15,000.00 |
| Annual Percentage Rate (r) | 6.00% |
| Loan Term (t) | 4 Years |
| FINANCE CHARGE (Total Interest) |
$3,600.00
($15k × 0.06 × 4) |
| TOTAL PAYMENTS | $18,600.00 |
| *This assumes you make all payments exactly on schedule. | |
Financial Tip: Most US car loans calculate simple interest on a daily basis. This means if you pay extra towards the Principal early in the loan, you reduce the "P" in the formula, which lowers the "I" for all future days. You can pay off the loan faster and cheaper!
US Market Context: Simple vs. Amortized
- Auto Loans: While the calculation is "Simple Interest" (based on the balance), the payments are "Amortized" (fixed monthly). This creates a curve where you pay mostly interest at the start and mostly principal at the end.
- Student Loans: Federal student loans in the US typically use a simple interest formula. Interest accrues daily but does not compound unless it is "Capitalized" (added to the principal) after a deferment period.
- Private Lending: If you borrow $1,000 from a friend and agree to pay back $1,100 in a year, that is a 10% simple interest agreement.
Frequently Asked Questions (FAQs)
How do I convert months to years for the formula?
The "t" in the formula I = Prt must be in years. If your loan is for 18 months, you must divide by 12.
18 months / 12 = 1.5 Years.
Does simple interest ever compound?
By definition, no. However, if you fail to pay the interest, the lender might add it to your principal balance (Capitalization). Once that happens, you start paying "Interest on Interest," which effectively becomes compound interest.
What is "Daily Simple Interest"?
This is the standard for US car loans. The bank calculates:
(Balance × Rate) / 365 = Daily Interest Cost.
Every day you wait to make a payment, this amount gets added to what you owe.
Is a Mortgage Simple Interest?
Technically, yes, in terms of daily accrual, but mortgages use a complex Amortization Schedule. While the math for one month looks like simple interest, the long-term structure is designed to pay off the house over 15 or 30 years.
How do I calculate the Rate if I know the Interest?
You can rearrange the formula algebraically: r = I / (P × t).
Example: Paid $200 interest on a $1000 loan for 2 years. Rate = 200 / (1000 × 2) = 0.10 (10%).
