Understanding the concept
Simple interest is calculated only on the original principal. Unlike compound interest, previously earned interest does not itself earn additional interest.
This lesson uses simple, fixed examples to explain the method. Identify the quantities, choose the correct formula, and check that the units in your answer make sense.
Simple interest formula
Interest = principal × annual rate × time in years. Convert the percentage rate to a decimal before multiplying.
Write down the original values before substituting numbers. Keep full precision during the calculation and round only when presenting the final result.
Worked example
Question: Calculate simple interest on $2,000 at 4% per year for 3 years.
- Convert 4% to 0.04.
- Multiply 2,000 × 0.04 × 3 = 240.
- Add the interest to the principal: 2,000 + 240 = 2,240.
Check the answer against the original question. An answer should include the appropriate unit or percentage where relevant.
Key points to remember
- Principal means the starting amount.
- The interest earned each full year is the same when the rate stays fixed.
- Actual loans can include fees, repayment schedules and other conditions.
Common mistakes
Using the compound-interest formula for a question that explicitly specifies simple interest.
To avoid this, label each number, identify the starting amount and use a quick estimate to see whether the final answer is reasonable.
Try it yourself
Find simple interest on $500 at 6% per year for 2 years.
Show the worked answer
Answer: 60. Try working through the method above before checking your result.
Simple-interest calculation guide
Use this table as a quick reference. Check which quantities and units each method requires before calculating.
| Situation | Method or meaning | Calculation | Result |
|---|---|---|---|
| Principal | The starting amount | P = $1,000 | $1,000 |
| Annual rate | Convert percent to decimal | 6% ÷ 100 = 0.06 | r = 0.06 |
| Time | Express in years for an annual rate | 6 months ÷ 12 = 0.5 | t = 0.5 years |
| Interest | Multiply principal, rate and time | 1,000 × 0.06 × 0.5 = 30 | $30 interest |
More worked examples
Work through each calculation and notice how the method changes with the question.
Example 1: Invest $2,000 at 4% for 3 years
Method: 2,000 × 0.04 × 3 = 240.
Example 2: Borrow $800 at 5% for 9 months
Method: 800 × 0.05 × (9/12) = 30.
Example 3: Find total after $1,500 at 3% for 2 years
Method: 1,500 + 1,500 × 0.03 × 2 = 1,590.
Using this in everyday life
Simple interest uses the original principal each period. Real loans and accounts may use compounding, daily accrual, fees and different day-count methods; check product terms.
Before you begin: Identify what the question asks, write down the given information, use matching units, then estimate the result to catch mistakes.
Extra practice questions
Try these independently before expanding the answer. Show your working, not just the final number.
Question 1. Interest on $500 at 8% for 2 years
Show answer and working
500 × 0.08 × 2 = 80.
Answer: $80
Question 2. Interest on $900 at 4% for 6 months
Show answer and working
900 × 0.04 × 0.5 = 18.
Answer: $18
Question 3. Total after $1,000 at 7% for 3 years
Show answer and working
1,000 + 1,000 × 0.07 × 3 = 1,210.
Answer: $1,210
Question 4. What is one year’s interest on $250 at 10%?
Show answer and working
250 × 0.10 = 25.
Answer: $25
Question 5. Interest on $2,400 at 5% for 3 months
Show answer and working
2,400 × 0.05 × 0.25 = 30.
Answer: $30