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$5,000 at 7% for 3 years costs $1,050 in simple interest — $6,050 total. The compound version would be $1,125. The gap grows with time.
Simple interest charges only on the original principal — no interest on interest — which makes it the borrower-friendly math behind many auto loans, short-term notes, and some personal loans. The formula is one line: I = P × r × t. This calculator runs it instantly and shows the compound-interest counterpart alongside, because the difference between the two is the entire story of long-term debt and savings.
Borrowers use it before signing the short-term note: $5,000 at 7% for 3 years is $1,050 simple — and the calculator shows what compound would have cost for comparison.
Simple interest accrues only on the original principal; compound interest accrues on principal plus all previously earned interest. On $5,000 at 7% for 3 years: simple earns $1,050 ($350 every year, identical); compound earns $1,125 — the gap is small early and explodes later. At 30 years the same money earns $10,500 simple but $38,061 compounded — 3.6× more. Which one applies to you depends on the contract: most auto loans and short-term personal notes use simple interest (good for borrowers who pay early), while savings accounts, credit cards, and mortgages compound. The rule to remember: simple favors the borrower, compound favors the lender — and time is the multiplier that decides how much.
Most auto loans, many personal loans, some student loans during certain periods, and most short-term business notes. The practical consequence of a simple-interest loan: paying early genuinely saves money, because interest accrues daily on the outstanding balance only — an extra $100 toward principal permanently removes that $100 from the interest base. Contrast with precomputed loans (Rule of 78s), where interest is front-loaded and early payoff saves much less — always check the contract for "precomputed" or "Rule of 78" language. Credit cards and mortgages are NOT simple interest: cards compound daily, mortgages amortize monthly. The fastest test: if the paperwork states a per-diem (daily interest) figure, you have a simple-interest loan and early payment is your lever.
Convert the time to years and multiply: 6 months = 0.5 years, 90 days ≈ 0.246 years (90/365). Banks use two day-count conventions — ordinary interest (360-day year, "banker's year") versus exact interest (365 days) — and the 360 convention quietly earns the lender about 1.4% more on the same nominal rate. Example: $10,000 at 8% for 90 days is $197.26 using 365 days but $200.00 using 360. For a sanity check, remember that the monthly interest on a simple loan is roughly principal × rate ÷ 12: $10,000 at 8% ≈ $66.67 per month. If a quote comes in dramatically above that line, the loan is not actually simple interest — it has fees or compounding hiding inside.