Simple interest formula
Simple interest is calculated only on the original principal for the entire duration: Interest = P × r × t ÷ 100, where P is principal, r is the annual rate, and t is time in years. Unlike compound interest, previously earned interest never earns further interest.
Where simple interest is commonly used
Short-term loans, some car loans, and certain fixed-term deposits use simple interest because it's predictable and easy to calculate upfront. Most long-term savings and investment products use compound interest instead, since it grows faster over time.
Simple vs compound interest — a quick comparison
On the same principal and rate, simple interest grows in a straight line, while compound interest grows in a curve that accelerates over time. For short durations the difference is small; over many years, compound interest can substantially outpace simple interest.
Frequently asked questions
Which is better for borrowers? Simple interest is generally cheaper for borrowers, since interest doesn't compound on itself — always check which method your loan uses.
Can simple interest apply to savings? Yes, some basic fixed deposits and short-term bonds use simple interest, though compound interest is more common for long-term savings products.