Simple Interest Calculator
What is Simple Interest?
Simple interest is the most basic form of interest calculation where interest is calculated only on the principal amount. Unlike compound interest, it does not take into account the accumulated interest from previous periods.
This type of interest is commonly used for short-term loans, consumer loans, and some types of bonds. It's easier to calculate and understand compared to compound interest.
How to Calculate Simple Interest
The simple interest formula is: I = P × r × t, where:
- I = Interest amount
- P = Principal (initial amount)
- r = Annual interest rate (as a decimal)
- t = Time in years
The total amount (A) after the interest period is: A = P + I
Applications of Simple Interest
Simple interest is commonly used in various financial scenarios:
- Short-term personal loans
- Car loans
- Consumer loans
- Some types of mortgages
- Treasury bills and other government securities
Frequently Asked Questions
What's the difference between simple and compound interest?
Simple interest is calculated only on the principal amount, while compound interest is calculated on both the principal and accumulated interest from previous periods.
When is simple interest typically used?
Simple interest is commonly used for short-term loans, car loans, and some types of bonds. It's preferred when the loan term is short or when a simpler calculation method is desired.
Is simple interest better than compound interest?
Neither is inherently better - it depends on your situation. Simple interest is better when borrowing money as you'll pay less in interest. However, compound interest is better for savings and investments as your money grows faster.