What is Simple Interest?
Simple Interest (SI) is a method of calculating interest where the interest amount is fixed and calculated only on the original Principal amount. It does not earn interest on interest (unlike Compound Interest).
It is commonly used for short-term loans, car loans marketed as "Flat Rate," and informal lending between friends and family.
Simple Interest vs Compound Interest
| Feature | Simple Interest (SI) | Compound Interest (CI) |
|---|---|---|
| Formula | Interest on Principal only | Interest on Principal + Interest |
| Growth | Linear (Slow) | Exponential (Fast) |
| Returns | Lower Returns | Higher Returns |
| Used In | Car Loans (Flat), Short-Term Loans | Mutual Funds, FDs, Home Loans |
The “Flat Rate” Loan Trap
The Flat Rate Trap: Many car dealers advertise a "Flat Interest Rate" (e.g., 7%) which sounds cheap. However, because you pay interest on the full principal throughout the tenure (even as you repay it), the effective rate is almost double (approx 13-14%).
Always convert Flat Rate to Reducing Balance Rate before taking a loan.
Simple Interest Formula
The standard formula for calculating simple interest is:
- SI = Simple Interest
- P = Principal Amount
- R = Rate of Interest per annum
- T = Time Period (Years)
How This Calculator Helps You
Quick Estimates
Instantly calculate the true cost of “Flat Rate” loans.
Investment Checks
Verify returns on bonds or non-compounding instruments.
Educational Use
Understand how money grows linearly without compounding.