What is simple interest?
Simple interest is interest calculated strictly on the initial principal, without accumulating on interest earned in previous periods. This yields linear growth: the interest amount earned in each period remains constant, unlike compound interest where each period earns returns on a progressively higher balance.
In practice, for identical rate and time conditions, simple interest always yields less than compound interest, except during the very first period when both produce identical amounts.
Simple interest formula
The formula is:
I = P × r × t
- I: interest earned
- P: initial principal
- r: interest rate per period (as a decimal)
- t: number of periods
The final amount is A = P + I. Unlike compound interest, simple interest does not involve exponential conversion between annual and monthly rates; conversion is directly proportional, meaning an annual rate of 12% is equal to 1% per month.
Practical example
With $1,000 in initial capital and a 1% monthly rate over 5 years (60 months), simple interest earns exactly $600, reaching a total final capital of $1,600. Compare this result with our compound interest calculator: under identical parameters, compound interest would yield a final capital over $1,800.