Saving & investing

Simple interest: Definition, Formula and Example

Simple interest is interest calculated on principal without adding prior interest to the interest-bearing amount.

Scope: General financial concept; examples are hypothetical.

Other names and related labels: Noncompounding interest.

How it works

For an unchanged principal and rate, interest grows in proportion to elapsed time. If loan principal changes after payments, simple interest may instead accrue daily on the remaining principal. A one-deposit illustration is not a full repayment schedule.

Interest = principal × annual rate × years; ending amount = principal + interest

Use a decimal rate and matching time units. Daily loan calculations also need the contract’s day-count convention.

$2,000 at 5% for three years

Hold the principal unchanged and use an annual simple rate of 5%.

  1. Interest: $2,000 × 0.05 × 3 = $300.
  2. Ending amount: $2,000 + $300 = $2,300.

Simple interest is $300; the ending amount is $2,300.

No deposits, repayments, fees, taxes or capitalization; three years.

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Simple interest is not the same as a flat-rate loan quote

An amortizing loan’s outstanding balance falls with principal repayments. Applying the original principal for the entire loan term can overstate its interest. Check whether a quoted rate is on a declining balance, a flat balance or an APR.

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Sources and checks

Calculation methodology and review status · All glossary terms