What is Simple Interest?
Simple interest is interest calculated only on the original amount you invest or borrow, called the principal. The interest earned in one year is not added to the principal, so it does not earn further interest.
Because the interest is the same every year, simple interest grows in a straight line. It is commonly used for short-term loans, some deposits and many everyday interest calculations.
Simple interest differs from compound interest, where the interest earned is added back to the principal and itself starts earning interest.
Fun fact
At 10% simple interest, your money doubles in exactly 10 years, since you earn 10% of the original amount every year.
What is a Simple Interest Calculator?
A simple interest calculator works out the interest earned and the total amount you will have, based on the principal, the rate of interest and the time period.
Why you should use a Simple Interest Calculator?
- Quick results: See the interest and total amount instantly, without working it out by hand.
- Plan loans and deposits: Know exactly how much interest you will pay or earn before you commit.
- Helps in comparison: Compare different rates and time periods to find the option that suits you.
How Does a Simple Interest Calculator Work?
The simple interest calculator works on the following inputs:
- Principal Amount (P): The amount you invest or borrow.
- Rate of Interest (R): The yearly rate of interest.
- Time Period (T): Number of years.
The calculator relies on the following formula:
Simple Interest = P × R × T ÷ 100
- P
- Principal Amount
- R
- Rate of Interest per year
- T
- Time Period in years
The total amount is the principal plus the interest.
Formula to Calculate Simple Interest with an Example
Consider an example for a better understanding.
- Principal Amount: ₹1,00,000
- Rate of Interest: 10% per annum
- Time Period: 5 years
Using the formula:
SI = 1,00,000 × 10 × 5 ÷ 100
After calculation, the interest is ₹50,000, so the total amount is ₹1,50,000.
What are the benefits of Simple Interest?
- Easy to understand: The interest is the same every year, so it is easy to calculate and predict.
- Lower cost on loans: For borrowers, simple interest costs less than compound interest at the same rate.
- Transparent: You always know exactly how much interest you will pay or earn.