Interest Calculator

Simple Interest

Simple interest is a method of calculating the return on a borrowed or invested amount, considering only the initial value (principal) over time. Unlike compound interest, where interest is calculated on the accumulated amount, in simple interest, the interest is calculated only on the original amount, remaining constant over the period.

The basic formula for calculating simple interest is:

I = P × r × t

Where:
- I is the interest amount;
- P is the principal amount;
- r is the interest rate (expressed as a decimal);
- t is the time period.

This formula shows that simple interest is directly proportional to time and the interest rate. Therefore, the longer the application time or the higher the rate, the greater the accumulated interest will be.

Example of Daily Use

Imagine you lend $1,000 to a friend with the condition that they repay the loan in one year with a simple interest rate of 5% per year. Applying the formula:

I = 1000 × 0.05 × 1 = $50

Therefore, at the end of the period, your friend will pay you $1,050, with $1,000 being the principal amount and $50 being the interest. This is a practical example of how simple interest can be applied in everyday transactions, such as loans between friends or family members.