How simple interest works
Simple interest is charged or earned only on the original principal, never on interest that has already built up:
Interest = principal × yearly rate × time in years
At 5% a year, $10,000 earns $500 a year, or $1,500 over 3 years. For months, divide by 12; for days, banks usually divide by 365 (sometimes 360).
Simple vs. compound interest
- Simple interest – grows in a straight line. Common for auto loans, many personal loans, short-term notes and Treasury bills.
- Compound interest – adds earned interest to the balance, so growth speeds up. Common for savings accounts, CDs, investments and credit cards.
The calculator shows both, so you can see how much more compounding would earn or cost over the same time.
Frequently asked questions
Is my car loan simple interest?
Most U.S. auto loans use simple interest calculated daily on the balance. Paying early or paying extra reduces the interest you owe.
How is daily interest calculated?
Divide the yearly rate by 365 and multiply by the balance. At 6% on $20,000, interest is about $3.29 a day.
Which is better for savers?
Compound interest, because your interest also earns interest. For borrowers, simple interest usually costs less.