Quick Answer
Simple interest is calculated as SI = P × r × t, where P is the principal, r is the annual interest rate (as a decimal), and t is the time in years, unlike compound interest, it never earns interest on previously accumulated interest.
What Is Simple Interest?
Simple interest is the most basic form of interest calculation: it's charged or earned only on the original principal amount for the entire duration of a loan or investment, regardless of how much interest has already accrued. This makes it predictable and easy to calculate by hand, which is why it's still used for many short-term loans, certain bonds, and some auto loans.
The key distinction from compound interest is that simple interest grows linearly over time, a graph of the balance over time is a straight line, not a curve. For a borrower, simple interest loans are generally cheaper over time than equivalent compound interest loans, because you're never paying interest on interest.
Simple interest is commonly used for short-duration loans, certain promotional financing offers, and basic savings calculations where the math needs to be transparent and easy to verify.
How to Use
- 1Enter the principal amount (the amount borrowed or invested).
- 2Enter the annual interest rate.
- 3Enter the time period in years (or months, converted to a fraction of a year).
- 4The calculator returns the interest earned/owed and the total amount (principal + interest).
Formula
SI = P × r × tP = principal, r = annual rate as a decimal, t = time in years
A = P + SI = P × (1 + r × t)Example: PKR 50,000 at 8% annual simple interest for 3 years
- P = 50,000, r = 0.08, t = 3
- SI = 50,000 × 0.08 × 3 = 12,000
- Total Amount = 50,000 + 12,000
Tips & Things to Know
- Simple interest loans are usually more favorable to borrowers than compound interest loans of the same nominal rate, since interest never compounds on itself.
- Always check whether a lender is quoting simple or compound interest, the same percentage rate can mean very different total costs depending on which method applies.
- For partial years, convert months to a fraction of a year (e.g. 6 months = 0.5 years) before applying the formula.
- Simple interest is rarely used for long-term investments because it significantly understates the real growth potential compared to compounding.