When you borrow money, the lender usually expects you to pay interest. Most loans, including mortgages, student loans, and personal loans, use a simple interest formula to calculate your cost of borrowing. Simple interest can also apply to some savings accounts to help you grow your money.
How do you figure out what the interest on a loan or savings account adds up to? Let’s look at how to use a simple interest calculator and how it comes in handy when making financial decisions.
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How to use the simple interest calculator
Simple interest calculators rely on several specific pieces of information to tell you how much interest you’ll earn (or pay). Our calculator is designed to help you figure out how much your savings can grow. Here are three terms to know before you start using it.
- Principal: Your principal is the amount you put into a newly opened savings account. It’s also called the initial deposit.
- Annual interest rate: The annual interest rate is the rate you’ll earn on your savings over a one-year period.
- Term: The term is how long you plan to leave your money in savings.
Our simple interest calculator uses those three factors to tell you the total interest earned. Your end balance is your principal deposit, plus the total interest. In other words, it’s what you’ll end up with for your savings efforts.
Easy enough, right? Now, here’s how to use our simple interest calculator, step by step.
- Enter the principal. Use the slider to select a principal amount from $100 to $100,000. (You can also type the exact amount in the gray cell above the slider.)
- Enter the annual interest rate. Move the slider to choose an annual interest rate, from 0% to 25%, or type the rate in.
- Choose a term. Our simple interest calculator measures terms in years. Enter the number of years you plan to save, from 1 to 50.
If you’ve entered everything correctly, you should see your total interest earned and the end balance. You can experiment with different terms, rates, or deposit amounts to see how much your savings could increase. Here are a few examples of what you could end up with.
| Principal | Annual interest rate | Term | Interest earned |
| $500 | 1.25% | 1 year | $6 |
| $1,000 | 2.50% | 2 years | $50 |
| $5,000 | 3.75% | 3 years | $563 |
| $10,000 | 4.00% | 4 years | $1,600 |
| $25,000 | 4.25% | 5 years | $5,313 |
Break down the simple interest formula
The simple interest formula tells you how much interest accumulates over time on a principal amount. Here’s what it looks like:
I = Prt
Now, here’s what those letters mean:
- I = Interest
- P = Principal
- r = Rate
- t = Time or term
The formula is straightforward enough that you could figure it out yourself if you don’t have a simple interest calculator on hand. Interest formulas get a little more complicated, however, when you start talking about compounding.
Simple interest vs. compound interest
Simple interest is the interest you earn (or get paid) based on the principal, rate, and term. Compound interest is what you earn on your initial deposit, plus the interest that’s added to the principal over time. To calculate compound interest, you need to know three things:
- Principal amount
- Interest rate
- Compounding frequency (or how often interest is added to your balance)
Which is better, simple or compound interest?
Simple interest is usually better when you’re repaying debt. Since interest doesn’t compound, your cost of borrowing can potentially be lower. Compound interest is better when you’re parking money in a high-yield savings account or investment account.
The more often the interest compounds, the faster your money can grow.
When to use our simple interest calculator
A simple interest calculator makes sense when you want to estimate the cost of a loan, or if you’re opening a savings account that doesn’t compound interest.
For example, say you’re thinking about getting a personal loan to consolidate high-interest debt. A simple interest calculator could tell you:
- How much your monthly payments will be
- How much interest you’ll pay altogether over the life of the loan
That’s helpful if you want to compare loans from different lenders. You can experiment with different rates or terms to find the best loan option.
The same goes for savings accounts. You can estimate your total interest earned with savings accounts from different banks to see which one offers the most bang for your buck. Just make sure you’re comparing apples to apples.
That means if you’re looking at a simple interest savings account at Bank A, you compare it to the same type of account at Bank B, C, or D.
If you’re interested in a high-yield savings account you’ll most likely want to use our compound interest calculator instead. While you’re at it, take time to research the best savings accounts.
Article sources
At LendEDU, our writers and editors rely on primary sources, such as government data and websites, industry reports and whitepapers, and interviews with experts and company representatives. We also reference reputable company websites and research from established publishers. This approach allows us to produce content that is accurate, unbiased, and supported by reliable evidence. Read more about our editorial standards.
- BYU Idaho, Perform Calculations for Simple Interest
- Consumer Financial Protection Bureau, How Does Compound Interest Work?
About our contributors
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Written by Rebecca Lake, CEPF®Rebecca Lake is a certified educator in personal finance (CEPF®) and freelance writer specializing in finance.
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Edited by Kristen Barrett, MATKristen Barrett is a managing editor at LendEDU. She lives in Cincinnati, Ohio, with her wife and their three senior rescue dogs. She has edited and written personal finance content since 2015.