How to Calculate Simple Interest

Simple interest is the most basic way to charge or earn interest. It is calculated only on the original amount, never on interest already added. It is used for many car loans, short-term personal loans, some bonds and quick estimates. This guide covers the formula, how to solve it for any unknown, how to count days, and how simple interest works on a loan you’re repaying.

The simple interest formula

I = P × r × t
total amount = P + I = P × (1 + r × t)

• I is the interest.
• P is the principal: the amount borrowed or invested.
• r is the annual interest rate as a decimal.
• t is the time in years.

Worked example

You lend a friend $5,000 at 6% simple interest for 3 years:

1. Interest: 5,000 × 0.06 × 3 = $900.
2. Total to repay: 5,000 + 900 = $5,900.

The interest is the same $300 every year, because it is always calculated on the original $5,000. The simple interest calculator does this and handles rates quoted per month and terms in days.

Solving for principal, rate or time

The formula can be rearranged for any unknown:

Unknown	Formula	Example
Interest	I = P × r × t	$5,000, 6%, 3 years → $900
Principal	P = I ÷ (r × t)	$450 at 6% over 1.5 years → $5,000
Rate	r = I ÷ (P × t)	$450 on $5,000 over 1.5 years → 6%
Time	t = I ÷ (P × r)	$900 on $6,000 at 5% → 3 years

For loans with regular payments, where the rate is hidden in the payment, use the interest rate calculator instead.

Counting days: 365 vs. 360

When the term is in days, convert it to years. There are two common conventions:

• Exact (365-day): t = days ÷ 365. Used by most consumer loans and savings accounts.
• Banker’s rule (360-day): t = days ÷ 360. Used by many commercial loans. It produces slightly more interest.

Example: $8,000 at 7% for 90 days:

• 365-day: 8,000 × 0.07 × 90 ÷ 365 = $138.08.
• 360-day: 8,000 × 0.07 × 90 ÷ 360 = $140.00.

Your loan agreement states which convention applies. Count the days carefully: from the start date up to, but not including, the end date is the usual rule.

Simple interest on a loan you’re repaying

Most car loans and many personal loans are simple interest amortizing loans. Interest is still simple, charged only on the balance you owe, not on past interest, but the balance shrinks as you pay:

1. Each day, interest accrues at balance × rate ÷ 365.
2. Your payment first covers the interest since your last payment.
3. The rest reduces the principal, so the next period’s interest is smaller.

That is why paying early or adding extra to a car payment saves money: the balance drops sooner, so less interest accrues. To see the payment and total interest on a car loan, use the car loan calculator.

Simple vs. compound interest

With compound interest, interest is added to the balance and earns interest itself. Over long periods, the difference is large. $5,000 at 6% for 15 years earns $4,500 simple, but $6,982.79 compounded yearly. Savings accounts and credit cards compound, while short-term loans and many bonds use simple interest. Compare the two with the compound interest calculator.

Add-on interest: simple interest that costs more than it looks

Some lenders, especially for used cars and consumer financing, use add-on interest. Simple interest is calculated on the full amount for the whole term, added on, and then divided into equal payments:

interest = P × r × years
payment = (P + interest) ÷ number of payments

A $10,000 loan at 8% add-on for 3 years has interest of 10,000 × 0.08 × 3 = $2,400 and a payment of 12,400 ÷ 36 = $344.44. But you’re paying interest on the full $10,000 even as you repay it, so the true rate, the APR, is about 14.55%, nearly double the quoted rate. Ask for the APR on any loan quoted as “add-on”, or find it from the payment with the interest rate calculator.

Simple interest on savings

Some CDs and bonds pay simple interest out to you instead of compounding it. A $10,000 CD at 4.5% that pays interest out each year earns 10,000 × 0.045 × 2 = $900 over two years. If the same CD reinvested the interest, it would earn slightly more, because the second year’s interest would be charged on $10,450.

Simple interest in Excel

• Interest: =Prt, for example =5000*6%*3.
• Time from two dates: =YEARFRAC(start, end, 3) gives years on an actual/365 basis, and =YEARFRAC(start, end, 2) on an actual/360 basis.
• Combined: =8000*7%*YEARFRAC(A1, B1, 3) for interest between the dates in A1 and B1.

Checking a simple interest charge step by step

Suppose you borrowed $2,000 at 9% simple interest for 8 months and want to check the lender’s figure:

1. Convert the time to years. Using months: 8 ÷ 12 = 0.6667. Using exact days, for example 243 days: 243 ÷ 365 = 0.6658.
2. Multiply: 2,000 × 0.09 × 0.6667 = $120.00 by months, or 2,000 × 0.09 × 0.6658 = $119.84 by exact days.
3. Compare with the agreement. If the lender charged noticeably more, ask whether it used a 360-day year, charged fees as interest, or calculated interest on a different balance.

Small differences usually come down to the day count. Large ones usually mean fees or add-on interest.

Where you’ll see simple interest

• Car loans and many personal loans, with daily accrual on the balance.
• Short-term business loans and lines of credit, often with the 360-day rule.
• Bonds, whose coupon payments are simple interest on the face value.
• Certificates of deposit that pay out interest instead of compounding it.
• Quick estimates, such as checking roughly what a short loan will cost.

Common mistakes

• Using months as years. For 18 months, t = 1.5, not 18.
• Entering the rate as a whole number. 6% is 0.06 in the formula.
• Mixing day counts. Use the convention your agreement specifies.
• Assuming “simple interest loan” means interest is fixed upfront. On an amortizing simple interest loan, total interest depends on when you pay.
• Confusing a monthly rate with an annual one. 1% a month is 12% a year, not 1%.
• Ignoring fees. Fees aren’t part of I = P × r × t, but they raise the real cost of borrowing.

Frequently asked questions

What is the simple interest formula?

I = P × r × t. I is the interest, P the principal, r the annual rate as a decimal and t the time in years. $5,000 at 6% for 3 years earns 5,000 × 0.06 × 3 = $900.

How do I calculate simple interest for a number of days?

Convert the days to years. With the exact (365-day) method, t = days ÷ 365. With the banker's (360-day) method, t = days ÷ 360, which gives slightly more interest. $8,000 at 7% for 90 days is $138.08 using 365 days and $140.00 using 360.

Are car loans simple interest?

Most US car loans are simple interest loans. Interest accrues daily on the outstanding balance, and each payment covers the interest first, then principal. Paying early or extra reduces the interest you pay.

How do I find the rate from simple interest?

Rearrange the formula to r = I ÷ (P × t). $450 of interest on $5,000 over 1.5 years is 450 ÷ (5,000 × 1.5) = 6% a year.