Simple Interest Calculator
Simple interest, as opposed to compound interest, is very simple to calculate! With our calculator, you can determine even more easily how much interest you will have to pay on a simple interest loan.
What is a Simple Interest Calculator?
The name gives it away. Simple interest is indeed, a simple way of calculating the interest on a certain sum of borrowed money. With the simple interest methodology, the amount of interest paid is calculated by multiplying the principal borrowed with the rate of interest and the period of time that the money is borrowed for. For example, a loan consisting of $10,000 in principal accruing interest at 5% per year will have $500 of interest payments at the end of the first year, $500 at the second year, and so on. Notice that the interest amount does not change.
In our day to day lives, you may have seen this in several places. For example, your auto loan is most likely operating on a simple interest structure. If you bought your car for $10,000 at 7% over 5 years, you are likely paying $700 in interest payments each year. Use our Car Loan Calculator to determine your interest payments if you are in the midst of purchasing a vehicle for yourself.
The Hardbacon Simple Interest Calculator works in a similar fashion to simplify loan calculations for you based on simple interest assumptions. Some of the uses of the calculator include:
- Determining how much you will pay in interest at the end of each period
- Calculating the impact of changes in the loan interest rate or duration on your total interest payments
- Assessing the loan amount you can afford to take out based on the interest amount you can afford to pay over each month or year
- Comparing different simple interest loans based on the terms that you are quoted by your lender
How to use the Hardbacon Simple Interest Calculator
The Simple Interest Calculator is designed to provide you with a clear, succinct output that you can use for personal budgeting and forecasting purposes. Through the calculator’s user-friendly interface, the user just needs to enter four variables for the calculator to do its magic.
To use the calculator, you need to enter the following:
- Loan amount: The loan amount number is the principal sum of the money you are borrowing.
- Annual interest rate: The percentage interest that the bank (or any other institution that you borrowed the money from) is charging you for the funds they lend you
- Unit of time: You are offered a choice between ‘days’, ‘months’ and ‘years’. Depending on your particular loan, you can input the appropriate information.
- Loan duration: This is the actual number that goes with the above ‘unit of time’. For example, if your loan has a term of 3 years, you would enter ‘Years’ in ‘Unit of time’ and ‘3’ in ‘Loan duration’.
Understanding the results of the Simple Interest Calculator
Once you have input all of the required entries on the left of the screen, turn your attention to the right to see what type of interest you will end up paying over the life of the loan given the assumptions you have entered. You should see a few items here, namely:
- Loan amount: This represents the principal of the loan and should match the number you entered as an input in the field on the left.
- Interest earned: The ‘interest earned’ is likely the main number that you are looking for. The calculator determines exactly how much interest you can expect to pay (rounded to the nearest dollar) based on the assumptions you made on the left.
- Total amount including interest earned: This number is the final amount that you will repay to the lender at the maturity of the loan. As such, this comprises both the principal amount, as well as the interest earned amount. For example, if your principal was $50,000 and your interest was $2,000, then the total amount you have to repay at maturity is $52,000.
- Pie graph: The pie graph illustrates what percentage of your total repayment is made up of the original principal repayment and of the interest you pay. In general, a higher loan duration and higher annual interest rate will result in ‘interest earned’ having a greater proportion of the total repayment as more interest accrues over time.
Note: The ‘Interest earned’ and the ‘Loan amount’ should cumulatively add up to the ‘Total amount including interest earned’.
Learn more about the Simple Interest Calculator Inputs
While simple interest is a fundamentally easier concept to grasp than compound interest, you may be wondering about the specific inputs that go into it. Below, you will find a more thorough explanation of the inputs, as well as details on where you can find them if you are looking to compare between different loans before you sign on the dotted line for one.
Loan amount: The original principal amount should be self-explanatory. This is the number that the lender is willing to lend to you based on your creditworthiness and/or specific needs. You can find this on the loan contract that you sign.
Annual interest rate: The annual interest rate can either be fixed or variable (details below) depending on the type of loan you negotiate with the lender. Make sure that you know what type of rate you are receiving before you make a commitment. With variable rates, the rate charged to the borrower can often go up drastically if macroeconomic circumstances in the particular country change. You can find out your rate by reviewing the loan document or by contacting your lender directly.
Unit of time: Generally stated on the loan document as well, the unit of time can be measured in days, months or years. In the odd chance that you are quoted a loan’s duration in weeks, simply multiply by 7 to convert to days.
Loan duration: Lastly, the loan duration is another important consideration as typically, the longer the duration, the more the interest that gets accrued. If you can afford to pay off a loan on a shorter duration, it might be in your best interest to do so if you want to avoid higher interest charges.
Fixed vs. Variable Rates
The interest rate is arguably the most important aspect of any loan. Depending on how attractive the interest rate is, prospective borrowers may decide to obtain the loan or finance their required expenditures through other means. However, not all rates are created equal. As a borrower, it is highly important to distinguish between a fixed rate and a variable rate. While both have their pros and cons, a fixed rate is generally seen as better for budgeting purposes as the amount that the borrower pays each period will not change. In a variable rate loan though, this amount may change quite dramatically depending on the macro circumstances of the country you live in.
This is because the variable rate is most commonly tied to a central indicator (known as a benchmark rate). The London Interbank Offered Rate (LIBOR) is a common indicator. However, each lender has their own policies on what benchmark rate is used. A rate is then applied on top of this benchmark rate based on the borrower’s creditworthiness. For example, if the benchmark rate is 2.5%, then a customer with relatively good credit may get the benchmark + 1% (3.5%). However, a customer with a credit score that isn’t as good may get quoted benchmark + 4% (6.5%) or even more.
The underlying benchmark rate is subject to changes in the broader economy as discussed. As such, a rate that looks attractive today may not be attractive in a few months if the country itself is headed towards a rate hike. For example, if the benchmark rate changes from 2.5% to 3.5%, then even the borrower with good credit now has to pay 4.5% for their loan without any changes to their credit history.
If a borrower is expecting rates to go up in their country, then the fixed rate would be preferable to lock in a lower rate. If the borrower is expecting rates to decline, then a variable rate would be better to capitalize on the lower rate in future.
Frequently Asked Question
How do you calculate simple interest on a loan?
If the loan you are quoted has a duration of one year or more, simple interest is calculated as follows: Interest paid = Principal x Annual Interest Rate x Term.
If the loan you are quoted has a duration of less than a year or where there are more complicated frequencies, you can use the below formula:
Note that frequency is the number of periods in a year. For example, a term quoted in months would have a frequency of 12, and a term quoted in quarters would have a frequency of 4.
To illustrate, consider a loan with a principal of $10,000, interest rate of 5% annually, and a term of 6 months.