What Is Simple Interest?
Simple interest is calculated only on the original principal amount. The formula is I = P × r × t. Unlike compound interest, you don't earn interest on previously earned interest. This makes calculations straightforward but produces lower returns over time.
Simple Interest Formula
I = P × r × t, where I is total interest, P is the principal, r is the annual rate as a decimal, and t is time in years. The total amount is A = P + I = P(1 + rt). For example, $10,000 at 5% for 5 years earns $2,500 in interest.
Where Simple Interest Is Used
Simple interest is commonly used for car loans, short-term personal loans, some bonds, and treasury bills. It's also used to calculate interest for partial-year periods and as a comparison baseline against compound interest.