Simple interest formula
Simple interest is calculated only on the original principal. The formula is I = P x r x t, where P is the principal, r is the annual interest rate as a decimal, and t is the time in years. The total amount is A = P + I.
Simple vs compound interest
Simple interest grows in a straight line because the interest earned each year is the same. Compound interest grows faster because interest is added to the balance and starts earning interest itself. The difference is small over short periods but can become substantial over decades.
When is simple interest used?
Simple interest is commonly used for short-term loans, invoice finance, some savings examples, and teaching the basics of interest calculations. Many loans calculate interest daily on the outstanding principal, which is closer to simple interest than compound interest.