Sources: IRS, SEC, Federal Reserve, U.S. Bureau of Labor Statistics & U.S. Census Bureau. See our editorial standards.
Interest calculated only on the original principal amount, never on accumulated interest.
Definition: Interest calculated only on the original principal amount, never on accumulated interest.
Simple interest grows your money in a straight line. Because it ignores previously earned interest, it accumulates far more slowly than compound interest over time. Most car loans and some short-term personal loans use simple interest, which actually benefits borrowers compared with compounding debt.
I = P × r × t — where P is principal, r is the annual rate, and t is time in years.
$10,000 at 8% simple interest earns exactly $800 every year. After 30 years you have earned $24,000 in interest for a total of $34,000 — versus roughly $100,627 with compound interest.
Put this concept to work with our free Loan Calculator.
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