What is simple interest?
Simple interest is a percentage of the original amount for each year the money is borrowed or saved. Unlike compound interest, interest is never added to the balance, so the same amount is earned or charged every year.
Source OpenStax · Contemporary Mathematics, 6.3 Simple Interest ↗
How to calculate simple interest
Multiply the principal by the rate (as a decimal) and by the time in years. To find the principal, rate or time, the same formula is turned around.
Here it is with your numbers:
- Rate as a decimal (r): 5% ÷ 100 = 0.05.
- Time in years (t): 2.
- Interest: $10,000.00 × 0.05 × 2 = $1,000.00.
- Total: $10,000.00 + $1,000.00 = $11,000.00.
It means the interest is $500.00 for every year, always worked out on the original $10,000.00: simple interest is never added to the balance.
365 or 360 days in a year?
For a time in days, the yearly rate is split into a daily rate. Most use 365 days, but some lenders use a 360-day “banker’s year”, which charges a little more interest for the same days, and federal student loans use 365.25. Here is the interest on your principal and rate for each.
| Days in a year | Interest for 30 days |
|---|---|
| 365 days (a calendar year) | $41.10 |
| 360 days (the “banker’s year”) | $41.67 |
| 365.25 days (federal student loans) | $41.07 |
Source CFPB · Regulation Z, comment 17(c)(3) (360-day year) ↗Federal Student Aid · How interest is calculated ↗
FAQs
What is the formula for calculating simple interest?
Interest = principal × rate × time, or I = P × r × t, with the rate as a decimal (5% is 0.05) and the time in years. For months, divide by 12; for days, divide by 365. The total to pay back is P + I.
Source OpenStax · Contemporary Mathematics, 6.3 Simple Interest ↗
What is the simple interest on $10,000 at 5% for 2 years?
$10,000 × 0.05 × 2 = $1,000, so $11,000 is paid back in total. That is $500 for each year.
What is the simple interest on $1000 at 5% for 3 years?
$1,000 × 0.05 × 3 = $150.00, so $1,150.00 in total.
What is simple interest on a loan?
It means interest is charged only on the amount borrowed, not on interest. Many loans work out simple interest day by day on the balance you still owe: federal student loans multiply the balance by the rate ÷ 365.25 and by the days since your last payment.
Sources
- OpenStax: Contemporary Mathematics, 6.3 Simple Interest
- Federal Student Aid: How interest is calculated
- CFPB: Regulation Z, comment 17(c)(3) (360-day year)