How this number is made
Simple interest does not earn interest on interest. Some short-term notes and some car-loan disclosures still talk this way. A savings account that compounds is the compound-interest page, not this one.
- The rate is annual.
- Years can be a fraction, such as 0.5 for six months.
Formula
Interest = principal × rate × years. Amount owed or earned = principal + interest.
Worked example
With the figures already in the form, simple interest is $900.00.
Questions
How is this different from compound interest?
Compound interest adds each period’s interest to the principal. Simple interest never does. Over many years the gap is large. Over a few months it is small.
Is a car loan simple interest?
Many consumer loans accrue interest daily on the remaining principal, which is a form of simple interest on a falling balance, not this flat formula. This page is the textbook P × r × t.