What Is Simple Interest?
Simple interest is the amount paid on a principal balance without considering compounding periods. It uses an agreed-upon interest rate, principal amount, and loan term. Try the simple interest calculator below to explore how much interest you might pay (or earn) with different principal amounts, interest rates, and terms.
Note: Using the simple interest method is best for paying a lower total interest over the life of a loan, as opposed to using compounding interest.
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Simple Interest Calculator
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Simple Interest Calculator
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Credit Products Using Simple Interest
- Home Mortgages: Most fixed-rate mortgages use simple interest to calculate your monthly mortgage payments. Check your mortgage amortization schedule to understand your breakdown between principal and interest payments. (Read about 30-year fixed-rate mortgages).
- Personal Loans: Some short-term personal loans use simple interest. These loans are usually only for a few months and $1,000 or less. (Read about payday loans).
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Simple vs. Compounding Interest
The two main ways to calculate how interest is earned or accrued are simple or compounding interest. Here is the difference:
- Compounding Interest: Compound interest is defined as the interest you earn on the funds you have saved and on the interest you earn along the way.[2] Many credit products, like credit cards, use compounding interest. Savings products, like high-yield online savings accounts, also use compounding interest.
- Simple Interest: Simple interest is calculated only on the original principal balance of the account or loan. It is better for borrowers because they pay less interest over the life of the loan. Short-term installment loans or personal loans use simple interest.
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Smart Summary
Simple interest is paid on debt products or investments without considering compounding periods. Borrowers prefer simple interest because it keeps the total interest paid over the life of the loan much lower than if compounding interest was applied. On the other hand, investors prefer saving products like bonds, dividend-paying stocks, and REITs that use compounding interest. Personal loans, auto loans, and most fixed-income mortgages use simple interest.
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(1) Navy Federal. How Does Interest Work on a Car Loan? Last Accessed January 12, 2025.
(2) Consumer Finance. How does compound interest work? Last Accessed January 12, 2025.
