Simple Interest Calculator
Simple interest is charged only on the original sum. It still appears in short-term loans, bonds and some flat-rate credit agreements.
The formula
The defining feature is that interest is calculated on the original principal every period. £10,000 at 5 % earns exactly £500 in year one, year two and year ten. Nothing accumulates on the interest itself.
Simple versus compound
| Years | Simple at 5 % | Compound at 5 % | Gap |
|---|---|---|---|
| 1 | £10,500 | £10,500 | £0 |
| 5 | £12,500 | £12,763 | £263 |
| 10 | £15,000 | £16,289 | £1,289 |
| 20 | £20,000 | £26,533 | £6,533 |
| 30 | £25,000 | £43,219 | £18,219 |
Over one period they are identical. The gap widens slowly, then dramatically — by year 30 the compound total is nearly double the simple one. Simple interest grows linearly; compound interest grows exponentially, and the difference is the whole argument for investing early.
As a borrower you want simple interest. As a saver you want compound.
Where simple interest is still used
- Short-term and bridging loans, where the term is too short for compounding to matter much.
- Car finance and hire purchase in flat-rate form. This is worth understanding: a “5 % flat rate” on a car loan is not a 5 % APR. Because you repay the balance gradually but pay interest on the full original amount throughout, the effective APR is roughly double the flat rate.
- Bonds and certificates that pay a fixed coupon without reinvestment.
- Statutory interest on late payments and court judgments, which is usually simple.
The flat rate trap. Borrow £10,000 over 4 years at a 5 % flat rate and you pay £2,000 in interest — but your average outstanding balance is only about £5,000, not £10,000. The true APR is closer to 9.5 %. Always ask for the APR.
Frequently asked questions
Which is better for a borrower?
Simple interest, always, at the same stated rate — you never pay interest on interest. The catch is that flat rates quoted as simple interest are usually set higher precisely because of this, so compare the APR rather than the headline number.
Do savings accounts use simple interest?
Almost never. Interest is normally credited to the balance and then earns interest itself, which is compounding. The exception is an account that pays interest away to a separate account — that behaves like simple interest on the original balance.
How do I convert a flat rate to an APR?
There is no exact shortcut, but doubling the flat rate is a reasonable approximation for a loan repaid in equal instalments. For an accurate figure, take the total interest and the repayment schedule and use the loan calculator to find the rate that produces the same payment.