Home
Back
Simple Interest Formula:
| From: | To: |
Simple interest is a method of calculating interest where the interest is computed only on the principal amount, without compounding over time. It is commonly used for short-term loans and some types of investments like certificates of deposit (CDs) without compounding.
The calculator uses the simple interest formula:
Where:
Explanation: The formula calculates interest by multiplying the principal amount by the annual interest rate (converted to decimal) and the time period in years.
Details: Understanding simple interest is crucial for financial planning, investment decisions, and loan calculations. It helps investors and borrowers understand the cost or return on financial products without the complexity of compounding.
Tips: Enter the principal amount in dollars, annual interest rate as a percentage (e.g., 5 for 5%), and time period in years. All values must be positive numbers.
Q1: What's the difference between simple interest and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on both the principal and accumulated interest, leading to exponential growth.
Q2: When is simple interest typically used?
A: Simple interest is commonly used for short-term loans, some types of bonds, and certificates of deposit that don't compound interest.
Q3: How do I convert annual percentage rate to decimal?
A: Divide the percentage rate by 100. For example, 5% becomes 0.05 in decimal form.
Q4: Can this calculator handle partial years?
A: Yes, you can enter fractional years (e.g., 0.5 for 6 months or 2.5 for 2 years and 6 months).
Q5: Is simple interest better than compound interest for investments?
A: Generally, compound interest yields higher returns over time due to the compounding effect. Simple interest is simpler to calculate but typically results in lower returns for long-term investments.