How it works
I = P × r × t
- I — interest
- P — principal (starting amount)
- r — yearly rate as a decimal (5% = 0.05)
- t — time in years (6 months = 0.5)
Because interest is never added to the balance, it grows in a straight line: 10,000 at 5% earns 500 every year, so 1,500 after three years. Compound interest on the same amount would earn 1,576, and the gap widens every year.
Simple interest is used for many car loans, short-term personal loans, bonds paying fixed coupons and some savings certificates. For savings that reinvest interest, use the compound interest calculator instead.