Interest basics Updated November 2026

Simple interest

Simple interest is calculated on the original principal only: I = P x r x t, where P is the principal, r the annual rate as a decimal and t the time in years. The total repaid is P + I. Interest never earns interest, so the amount grows by the same sum each period.

Syntax

I = P x r x t   (total = P x (1 + r x t))

Part	What it is
`P`	Principal, the amount lent or deposited
`r`	Annual interest rate as a decimal (5% = 0.05)
`t`	Time in years; months / 12 or days / 365 (or 360 for a bank year)

Examples

P = 1,000, r = 5%, t = 3 years
I = 1,000 x 0.05 x 3

Result: I = 150.00; total repaid 1,150.00

Excel: =1000*5%*3

P = 2,500, r = 4%, t = 6 months
I = 2,500 x 0.04 x 6/12

Result: I = 50.00

P = 1,200, r = 6%, t = 90 days (360-day year)
I = 1,200 x 0.06 x 90/360

Result: I = 18.00

With a 365-day year: 1,200 x 0.06 x 90/365 = 17.75

Common mistakes

Using the rate as a whole number (5 instead of 0.05) gives an answer 100 times too large; divide the percentage by 100 first.
Plugging in months as if they were years (t = 6 instead of 6/12) overstates interest twelvefold; always convert time to years.
Treating a loan that compounds (most savings accounts and mortgages) as simple interest understates what is actually earned or owed.

Practice Simple interest

These drills check your answer on live data, free, no account needed.

Simple interest earnedYou lend $2,000 to a local bakery at 2.25% simple interest per year. The interest is paid in one sum at the end and never earns interest itself. How much interest is owed after 7 years?
Simple vs compound interestTwo accounts each start with $2,000 and earn 3.25% per year for 20 years. Account A pays simple interest. Account B compounds annually. How much more does Account B hold at the end?

Questions

What is the difference between simple and compound interest?

Simple interest is charged on the principal only, so it grows linearly. Compound interest is charged on principal plus accumulated interest, so it grows exponentially. Over 3 years at 5% on 1,000, simple interest gives 150 and compound gives 157.63.

How do I calculate simple interest per month?

Divide the annual rate by 12 and multiply by the principal: 1,000 at 6% earns 1,000 x 0.06 / 12 = 5.00 per month.

Compound interestThe compound interest formula A = P(1 + r/n)^(nt), what each symbol means, examples for yearly and monthly compounding, the Excel FV function and errors.
Future valueHow to calculate the future value of a lump sum with FV = PV x (1 + r)^n, step-by-step examples, the Excel FV function with its sign convention, and errors.
APR vs APYAPR is the yearly rate without compounding; APY includes it. Convert with APY = (1 + APR/n)^n - 1, worked examples and the Excel EFFECT and NOMINAL functions.
Cost of trade creditSkipping an early payment discount such as 2/10 net 30 is an expensive loan: annual cost = d / (1 - d) x 365 / extra days, about 37%. Examples, when to pay.