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Simple interest is calculated only on the original principal. It does not include compounding.
What is simple interest?
Simple interest is calculated only on the original principal amount. Unlike compound interest, previously earned interest does not itself earn more interest.
Simple Interest = Principal × Rate × Time
Worked example
If £10,000 earns simple interest at 5% per year for 3 years, the interest is £1,500. The final amount is £11,500.
Simple interest versus compound interest
Simple interest grows in a straight-line pattern because the interest base does not change. Compound interest can grow faster because interest is added to the balance and can generate further growth.
How to interpret the result
Simple interest is useful for understanding basic borrowing and savings examples where interest is calculated on the original amount only. Real products may use compounding, daily interest, fees or changing rates.
When this calculator is useful
Simple interest is useful for classroom examples, short-term borrowing illustrations and products where interest is calculated only on the original principal rather than on a growing balance.
Worked examples
Example 1: Savings
£10,000 at 5% simple interest for three years earns £1,500, producing a final amount of £11,500.
Example 2: Short-term borrowing
£4,000 at 6% simple interest for two years produces £480 of interest, before any fees or other charges.
Common mistakes to avoid
- Using simple interest when the real product compounds interest.
- Forgetting to convert months into years when using the annual formula.
- Confusing the interest amount with the final balance.
- Comparing a simple interest rate directly with an APR without checking how each is defined.
Assumptions and limitations
The calculator assumes the principal stays unchanged and interest is calculated only on that original amount. It excludes fees, changing rates, repayment schedules and compounding.
Related calculators
Compound Interest Calculator · Loan Payment Calculator · Savings Calculator
Frequently asked questions
Does simple interest compound?
No. It is calculated only on the original principal.
Can simple interest be used for loans?
Some loan examples use simple interest, but actual lenders may calculate interest differently. Always check the product terms.
What happens if the rate is 0%?
The interest is zero and the final amount equals the original principal.