The formula
Interest = P × r × t, where P is principal, r is the annual rate as a decimal and t is time in years. The total amount you end with is simply P + interest.
Because interest never earns interest, every year adds exactly the same amount. On 10,000 at 6%, you earn 600 in year one, 600 in year two, and 600 in every year after, forever.
Simple vs compound: the real cost
Over one year the two are identical. Over five years, 10,000 at 6% simple interest earns 3,000, while the same money compounded annually earns 3,382. Over twenty years the gap widens dramatically: 12,000 versus 22,071.
The practical lesson is that you want compound interest when saving and simple interest when borrowing. If a lender quotes simple interest, that is usually good for you.
Frequently asked questions
When is simple interest actually used?
Short-term personal loans, some car loans, certain government schemes, treasury bills and many informal or family loans. It is also standard for calculating interest on overdue invoices.
Which is better for me?
As a saver you want compound interest. As a borrower you want simple interest, because your interest never starts earning interest for the lender.
How do I convert a monthly rate to annual?
Multiply by 12 for simple interest. Compound interest requires (1 + monthly)^12 − 1, which gives a slightly higher effective rate.
Does the time period have to be whole years?
No. The formula works with fractions, so 6 months is 0.5 years. This calculator uses whole years for the table, but the underlying math handles any period.
Is simple interest ever better than compound for a saver?
Only if the simple rate is meaningfully higher. Compare the total returned amount rather than the headline rates, especially over long periods.
Does this include tax?
No. Results are before tax. Interest income is usually taxable, so apply your local rate to the interest figure.