Calculate simple interest based on principal, rate and time, without compounding.
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The simple interest formula is: Simple Interest = (Principal × Rate × Time) ÷ 100, where Principal is the amount borrowed or invested, Rate is the annual interest rate as a percentage, and Time is the duration in years.
For example, to calculate simple interest on a principal of 5000 at 5% annual interest for 3 years: (5000 × 5 × 3) ÷ 100 = 750 in interest, for a total amount of 5750.
Unlike compound interest, which is calculated on the growing balance including previously earned interest, simple interest is always calculated on the original principal only, so it grows at a constant, linear rate rather than accelerating over time. This is why simple interest loans typically cost less in total interest than compound interest loans over the same term and rate.
Applying this formula to something that actually compounds, most savings accounts, credit cards and many loans compound interest, using the simple interest formula on them will understate the real growth or cost.
Entering the rate as a decimal (0.05) instead of a whole percentage (5), the formula in this calculator expects a percentage value.
Assuming extra payments toward principal reduce future interest the way they would on a compounding loan, with true simple interest, the interest is fixed by the original principal, rate and time, regardless of partial early payments.
Simple interest is calculated only on the original principal for the entire period, while compound interest is calculated on the principal plus any accumulated interest, causing it to grow faster over time.
Simple interest is commonly used for short-term loans, certain bonds, and some auto loans, where interest doesn't compound over the loan term.
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