How simple interest works
Simple interest is calculated only on the original principal, never on interest that has already accrued. Multiply the principal by the annual rate and by the number of years, and you have the total interest — the same amount is added every year regardless of how long the money is held.
Because the interest base never changes, the balance grows in a straight line rather than the accelerating curve you see with compound interest. That makes simple interest easy to predict and common for short-term loans, some auto financing, and certain bonds.
Reading the results
The interest figure is the total earned or owed over the whole term, and the final amount is the principal plus that interest. The donut chart shows how the final amount divides between your original principal and the interest portion.
A larger interest slice signals either a high rate, a long term, or both — useful when comparing one borrowing or savings option against another.
Simple versus compound
For the same rate and term, simple interest always produces a smaller total than compound interest, because compounding lets interest earn its own interest. The gap widens the longer the money is invested.
When you are borrowing, simple interest is usually the cheaper structure. When you are investing, compound interest is the one you want working for you.
Formula
interest = P·(rate/100)·years; amount = P + interestFrequently asked questions
- How is simple interest different from compound interest?
- Simple interest is calculated only on the original principal. Compound interest also earns interest on previously earned interest, so it grows faster over time.