How Simple Interest Works
Simple interest is one of the most fundamental formulas in mathematics and finance. Unlike compound interest, simple interest is computed only on the original principal sum. The interest earned or owed in one year does not get added to the balance to generate additional interest in subsequent years.
• P = Principal amount deposited or borrowed
• R = Annual interest rate in percent per year (% p.a.)
• T = Time period in years
Worked Example: ₹1,00,000 at 7.5% for 3 Years
Calculation Details
- Principal (P) = ₹1,00,000
- Annual Rate (R) = 7.5%
- Time (T) = 3 years
Formula Application
- $\text{SI} = \frac{1,00,000 \times 7.5 \times 3}{100} = \frac{22,50,000}{100} =$ ₹22,500
- $\text{Total Amount (A)} = P + \text{SI} = 1,00,000 + 22,500 =$ ₹1,22,500
- Annual interest accrued per year: ₹22,500 ÷ 3 = ₹7,500/year (constant every year).
Simple Interest vs. Compound Interest
The difference between simple and compound interest grows wider the longer the time horizon:
| Horizon (₹1 Lakh @ 8%) | Simple Interest (Total Amount) | Compound Interest (Annually) | Difference in Growth |
|---|---|---|---|
| 1 Year | ₹1,08,000 | ₹1,08,000 | ₹0 (Identical) |
| 5 Years | ₹1,40,000 | ₹1,46,933 | +₹6,933 for Compound |
| 10 Years | ₹1,80,000 | ₹2,15,892 | +₹35,892 for Compound |
| 20 Years | ₹2,60,000 | ₹4,66,096 | +₹2,06,096 for Compound |
Frequently Asked Questions
The simple interest formula is SI = (P × R × T) / 100, where P is Principal, R is Annual Interest Rate percentage, and T is Time period in years.
Simple interest is calculated exclusively on the original principal amount. Compound interest is calculated on the principal plus all interest accumulated from previous periods (interest on interest).
Simple interest is common in short-term promissory notes, automobile installment loans, informal peer lending, certain government debt bonds, and educational finance problems.
⚠️ Financial Disclaimer
This calculator is intended for mathematical and educational purposes. Commercial deposit or debt instruments may apply day-count conventions (such as 30/360 or Actual/365) or periodic compounding.