How simple interest works
Simple interest is calculated on the original principal only, every period, forever. At 6% on $10,000, you earn a flat $600 a year - $3,000 over five years - no matter how much interest has already accumulated. That makes growth a straight line rather than the accelerating curve you get when interest earns interest.
where P is the principal, r the annual rate as a decimal, and t the time in years. The chart above plots the same inputs both ways so you can see the gap open up; over short periods the difference is small, which is why simple interest survives in auto loans and bond coupons. Over decades it becomes enormous - our compound interest calculator shows just how far the curve pulls away.
Frequently asked questions
Where is simple interest actually used?
Most auto loans and many short-term personal loans accrue simple interest daily on the remaining balance, which is why paying early saves money. Bond coupons are also simple-interest math: a $1,000 bond at 5% pays a flat $50 a year, with no compounding inside the bond itself.
What's the difference between simple and compound interest?
Simple interest is always calculated on the original principal only; compound interest is calculated on principal plus interest already earned, so it grows faster and the gap widens every year.
Why do lenders quote APR but banks quote APY?
APR is a nominal rate that ignores compounding within the year, which makes a loan's cost look smaller; APY includes compounding, which makes a savings rate look bigger. Each side quotes the flavor that flatters its product - compare loans in APR and savings in APY, never across.