Saving & Growth

Simple Interest: How It Works

Learn how simple interest works, how to use the simple interest formula, and how principal, interest rate, and time determine the amount of interest earned or charged.

What is simple interest?

Simple interest is a method of calculating interest without adding previously earned interest to the amount used to calculate future interest. In the basic simple interest model, interest is calculated using the original amount of money invested or borrowed, known as the principal. When the principal and interest rate remain unchanged, the same amount of interest is earned or charged during each equal time period.

The basic formula below is a simplified way to understand simple interest. Some real-world loans calculate simple interest using the outstanding principal balance, which can decrease as payments are made.

I = P × r × t

Interest

The total amount of simple interest earned or charged.

Principal

The original amount of money invested or borrowed.

Annual interest rate

The percentage of the principal earned or charged as interest each year, expressed as a decimal in the formula. For example, 5% = 0.05.

Time

The length of time the money is invested or borrowed, expressed in years.

If you invest or borrow $1,000 at a 5% simple annual interest rate, the interest is always calculated using the original $1,000. This means $50 of interest is earned or charged each year. After 5 years, the total simple interest would be $250.

Try it yourself

See how rate and time affect simple interest

Keep the principal fixed at $1,000 and move the sliders to see how the interest rate and time affect simple interest.

Principal $1,000 Fixed for this example

Annual interest rate 5%

1% 15%

Time 5 years

1 year 30 years

Simple interest $250

Total amount $1,250

Using the formula I = P × r × t

I = $1,000 × 0.05 × 5

I = $250

Want to use your own values? Simple Interest Calculator

What changed and why?

See how each value affects the result

In this example, increasing the interest rate or time increases the total simple interest and total amount. Because the principal remains fixed at $1,000, the interest grows at a constant rate over time.

Key takeaway

What should you remember?

In the basic simple interest model, interest is calculated using the principal rather than previously accumulated interest. Increasing the interest rate or time increases the total interest, but previously earned interest does not generate additional interest.

Continue learning

Explore the concepts in more detail

Continue exploring the ideas behind saving, growth, interest, and purchasing power.