Simple interest formula
Interest = Principal × Rate × Time Total = Principal + Interest
The rate is written as a decimal and time is in years. $10,000 at 5% for 3 years earns 10,000 × 0.05 × 3 = $1,500, for a total of $11,500. For months, divide by 12; for days, divide by 365.
Simple vs. compound interest
Compound interest also earns interest on interest already added. Over short periods the difference is small; over many years it grows large. Savings accounts and CDs usually compound, while some car loans and short-term notes use simple interest.
Frequently asked questions
How do I find the rate if I know the interest?
Divide the interest by the principal times the time: Rate = Interest ÷ (Principal × Time). $1,500 ÷ (10,000 × 3) = 0.05, or 5%.
Do auto loans use simple interest?
Many do. Interest is figured on the balance each day, so paying early or extra lowers the interest you pay.