Simple Interest: The Straightforward Baseline
Simple interest is calculated only on the original principal — it does not compound. It is used in short-term loans, Treasury bills, some car loans, and as a transparent benchmark for comparing other interest structures.
The Formula
SI = P × R × T
P = principal
R = annual rate (as a decimal)
T = time in years
Total amount = P + SI = P(1 + RT)Examples
- £2,000 at 5% for 3 years: SI = 2,000 × 0.05 × 3 = £300
- £5,000 at 8% for 6 months: SI = 5,000 × 0.08 × 0.5 = £200
- £10,000 at 12% for 2 years: SI = 10,000 × 0.12 × 2 = £2,400
Finding the Rate, Time, or Principal
Rate = SI ÷ (P × T)
Time = SI ÷ (P × R)
Principal = SI ÷ (R × T)Simple vs Compound Interest: The Gap Widens Over Time
- £10,000 at 8% for 1 year: Simple £800 | Compound £800 (identical)
- £10,000 at 8% for 5 years: Simple £4,000 | Compound £4,693
- £10,000 at 8% for 20 years: Simple £16,000 | Compound £36,610
For short durations, simple and compound interest are nearly equivalent. For long durations, compound interest is dramatically larger — which is why it favours savers and borrowers pay more.
Calculate simple interest: Free Simple Interest Calculator