Simple Interest Formula
Calculate simple interest with the formula I = Prt.
Learn how basic interest works on loans and investments without compounding.
The Formula
I = P × r × t
Simple interest is calculated only on the original principal amount. Unlike compound interest, it does not earn interest on previously accumulated interest.
Variables
| Symbol | Meaning |
|---|---|
| I | Interest earned (or owed) |
| P | Principal (the original amount) |
| r | Annual interest rate (as a decimal, so 8% = 0.08) |
| t | Time in years |
Example 1
You lend a friend $2,000 at 5% simple interest for 3 years.
P = $2,000, r = 0.05, t = 3
I = 2000 × 0.05 × 3
I = 2000 × 0.15
I = $300 — Your friend owes you $2,300 in total.
Example 2
You take out a $15,000 car loan at 7% simple interest for 4 years.
P = $15,000, r = 0.07, t = 4
I = 15000 × 0.07 × 4
I = 15000 × 0.28
I = $4,200 — You will pay $19,200 in total.
When to Use It
Use the simple interest formula when:
- Calculating interest on short-term loans or personal lending
- Working with bonds that pay simple interest
- Estimating basic returns on a fixed deposit
- You want a quick approximation before using compound interest
Key Notes
- The rate r and time t must use the same unit — if r is an annual rate and t is in months, convert: either use r/12 per month or convert months to years; mixing units is the most common calculation error
- Total amount repaid is A = P + I = P(1 + rt) — this linear growth contrasts with compound interest's exponential A = P(1+r)ᵗ; the gap widens over time, so simple interest is always cheaper for the borrower on long-term loans
- Many short-term financial instruments use simple interest: Treasury bills, bridging loans, and some bonds calculate interest on a 360-day or 365-day year — always check which day-count convention applies before computing
- Rearranging for rate: r = I / (P × t); for time: t = I / (P × r) — these forms are useful when working backward from a known interest amount to find the implied rate or holding period