The Simple Interest Formula

Formula

I = Prt

Used to calculate: The amount of interest earned or owed on a principal amount when interest does not compound.

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What Is the Simple Interest Formula?

The simple interest formula calculates interest based only on the original principal. Unlike compound interest, previously earned or accumulated interest is not added to the principal when calculating future interest.

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Formula and Variables

I = Prt

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How to Use the Formula

Identify the principal, interest rate, and length of time. Convert the interest rate from a percentage to a decimal if necessary. Make sure the interest rate and time use corresponding periods, then multiply the principal by the rate and time to calculate the simple interest.

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When Is This Formula Used?

The simple interest formula is used when interest is calculated only on the original principal rather than on previously accumulated interest.

Common uses:

– Calculating interest on simple-interest loans
– Calculating earnings on investments that use simple interest
– Comparing simple-interest financial arrangements

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Important Notes

– Simple interest is calculated only on the original principal.
– The formula assumes a constant interest rate over the specified period.
– The time unit must correspond to the interest-rate period. For example, an annual interest rate should be paired with time expressed in years.
– A common point of confusion is entering the interest rate as a percentage rather than a decimal. For example, 5% is entered as 0.05.

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Alternate Forms

Alternate form:

P = \frac{I}{rt}

Alternate form:

r = \frac{I}{Pt}

Alternate form:

t = \frac{I}{Pr}

Alternate form:

A = P(1 + rt)

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Related Formulas

• The Compound Interest Formula
• The Percentage Formula
• The Percent Change Formula