The straightforward sibling of interest. No tricks, no exponential explosion — just one rate, one principal, predictable growth. Used for short loans, bonds, and exam questions everywhere.
Simple interest only ever earns interest on the original amount — never on previously earned interest. Predictable, easy to compute, but slower-growing than compound interest.
Short-term loans, some government bonds, car finance, layaway plans — many real contracts use simple interest because it's easier to verify by hand.
P = principal, r = rate per period, t = number of periods
$1,000 at 5% per year for 3 years.
I = 1000 × 0.05 × 3 = $150. Total = $1,150.
You borrow $2,500 at 8% simple interest for 6 months. How much interest?
Match the rate and the time to the same period. If the rate is 5% per year and you want interest for 9 months, t = 9/12 = 0.75 years — not t = 9.
- I = P × r × t — interest grows linearly.
- Total grows as A = P(1 + r·t) — straight line, not curve.
- Always match the units of rate and time before plugging in.