Hong Life CalculatorsUnderstanding the simple interest loan calculator — concept and principle
Simple interest is charged only on the original principal, never on interest already accrued. It is used for many short-term personal loans, some car loans, bonds' coupon calculations and informal loans between people. This calculator finds the total interest, the total repaid and, if the loan is repaid in equal monthly instalments, the monthly amount.
How it is calculated
- Interest I = P × r × t, where P is the principal, r the annual rate as a decimal and t the time in years.
- Total repaid = P + I.
- Monthly instalment (if repaid monthly) = (P + I) ÷ (t × 12).
For periods in months or days, convert to years first (for example 18 months = 1.5 years).
The principle
With simple interest, the lender earns the same amount each year: the principal times the rate. Because interest is never added to the balance, the total grows in a straight line with time, unlike compound interest, which grows exponentially. Spreading the fixed total over equal monthly instalments is sometimes called an add-on loan. Note that in that case the borrower repays principal throughout the term but still pays interest on the full original amount, so the effective annual rate is much higher than the quoted rate.
Worked example
Default inputs: principal $10,000, 7% a year, 3 years.
- Interest: 10,000 × 0.07 × 3 = $2,100.00.
- Total repaid: 10,000 + 2,100 = $12,100.00.
- Monthly instalment: 12,100 ÷ 36 = $336.11.
- Effective APR: the monthly rate at which 36 payments of $336.11 repay $10,000 is about 1.069%, × 12 = 12.83%.
How to read the result
Interest grows in proportion to rate and time: doubling either doubles the interest. When comparing loans, compare annual percentage rates (APR) rather than the add-on rate, because an amortising loan at 7% would cost less than $2,100 here (about $1,116 in interest on payments of about $308.77 a month).
Common mistakes
- Entering the rate as 7 instead of 0.07 in the formula.
- Using months as years.
- Treating an add-on rate as if it were an APR.
- Forgetting fees that raise the true cost.
Frequently asked questions
How much interest is $10,000 at 7% for 3 years?
$2,100 with simple interest.
What is the difference between simple and compound interest?
Compound interest adds interest to the balance so later interest is charged on it; simple interest does not.
Is simple interest better for borrowers?
For the same rate and term, simple interest never costs more than compound interest. But simple add-on interest repaid monthly costs more than an amortising loan at the same quoted rate.
Sources: Consumer Financial Protection Bureau, Regulation Z (Truth in Lending), 12 CFR Part 1026 · Brealey, Myers and Allen, Principles of Corporate Finance (simple and compound interest)