Simple Interest
What is the Simple Interest?
Simple interest grows by the same fixed amount every period, unlike compound interest, which grows on top of previously earned interest. It's called "simple" because it's always calculated on the original principal alone — a $1,000 loan at 5% simple interest earns exactly $50 every year, year after year, regardless of how many years have already passed.
Because R is given as a percentage rather than a decimal, the formula divides by 100 to convert it — SI = (P × R × T) / 100, not P × R × T. Forgetting that division is the most common error on this formula, and it produces an answer exactly 100 times too large, which is usually an easy sanity check: if a $2,000 loan at 5% for 3 years appears to earn $30,000 in interest, that's the giveaway the ÷100 step got skipped.
Simple interest shows up less often in real banking today than compound interest does, but it's still used for some short-term consumer loans, certain bonds, and installment plans, and it's the natural starting point for learning interest math before compounding is introduced — see the Compound Interest page for what changes once interest starts earning interest of its own.
What Each Variable Means
When to Use It
- Calculating interest on a short-term loan or basic savings account that doesn't compound
- Finding how long it takes an investment to earn a target amount of interest
- As a stepping stone before learning compound interest
Step-by-Step Example
Problem: Find the simple interest on $2,000 at 5% per year for 3 years.
Identify P, R, and T from the problem.
P = 2000, R = 5, T = 3Plug the values into SI = (P × R × T) / 100.
SI = (2000 × 5 × 3) / 100Multiply first, then divide by 100.
SI = 30000 / 100 = 300Interactive Calculator
Solving for Other Variables
P = (100 × SI) / (R × T)Solve for the principal when interest, rate, and time are known.R = (100 × SI) / (P × T)Solve for the rate when interest, principal, and time are known.T = (100 × SI) / (P × R)Solve for the time when interest, principal, and rate are known.Common Mistakes
Mistake: Forgetting to divide by 100 when R is a percentage.
Fix: R is a percentage — the formula divides by 100 to convert it to a decimal rate. Skipping that step gives an answer 100× too large.
Mistake: Reporting the interest as the total amount owed.
Fix: SI is just the interest earned. The total amount is P + SI, not SI alone.
Practice Questions
Find the simple interest on $1,500 at 4% for 2 years.
What principal earns $90 in interest at 6% over 3 years?
Hint: Rearrange SI = (P×R×T)/100 to solve for P.
Frequently Asked Questions
How is simple interest different from compound interest?
Simple interest is always calculated on the original principal. Compound interest is recalculated on the principal plus previously earned interest, so it grows faster — see the Compound Interest page for a direct comparison.
Can R be entered as a decimal instead of a percentage?
Not in this version of the formula — it expects R as a percentage (5, not 0.05) and divides by 100 internally. If you already have a decimal rate, multiply by 100 first or drop the ÷100 step.
Do most bank accounts use simple interest?
Rarely for savings accounts — those typically compound. Simple interest is more common for short-term loans, some bonds, and as a teaching model before compound interest.