Frequently Asked Questions
What's the difference between simple and compound interest?
Simple interest is calculated only on principal. Compound interest is calculated on principal plus accumulated interest. Over time, compound interest generates significantly more. For example, $10,000 at 7% for 30 years: simple interest = $21,000 total; compound interest = $76,123 total.
Is simple interest better for loans or savings?
Simple interest is better for borrowers—you pay less total interest. For savers/investors, compound interest is vastly superior. If you're offered a simple interest investment at the same rate as compound, the compound option will generate more wealth long-term.
How do I convert months to years for the formula?
Divide months by 12. For 6 months: T = 6/12 = 0.5 years. For 18 months: T = 18/12 = 1.5 years. This calculator handles the conversion automatically when you select time units.
Can I calculate simple interest for days?
Yes. Use T = days/365. For 90 days: T = 90/365 = 0.2466 years. Some calculations use 360 days (banker's year). This calculator uses 365 days for accuracy.
Why don't most investments use simple interest?
Because compound interest benefits both parties more. Investors earn more. Banks and financial institutions prefer compound interest on loans because borrowers pay more over time. Simple interest is rare in modern finance except for specific short-term products.
What is add-on interest?
Add-on interest is a variation where total interest is calculated upfront and added to principal, then divided into equal payments. Common in auto loans and some personal loans. Effectively charges interest on interest you've already paid, making true cost higher than stated rate.
How accurate is this calculator?
Mathematically exact for simple interest. However, real-world financial products rarely use pure simple interest. Use this for quick estimates or understanding concepts. For actual loans/investments, use the specific calculator for that product type.
Can I use this for credit card interest?
No—credit cards use daily compounding, which is much more expensive. Simple interest significantly underestimates credit card costs. Use a credit card payoff calculator for accurate projections. Never carry credit card balances if possible.
What about simple interest amortization?
Even with simple interest calculation, most loans amortize (pay interest first). Early payments are mostly interest; later payments are mostly principal. This differs from "simple interest loans" where interest is calculated daily on current balance, commonly used for auto loans.
Why learn simple interest if it's rarely used?
Foundation for understanding compound interest. Quick mental math for estimates. Some specific products still use it. Educational value—understanding basics helps you analyze complex products and spot bad deals. Financial literacy starts with fundamentals.
Is car loan interest simple or compound?
Most auto loans use simple interest calculated on remaining balance daily. As you pay down principal, interest decreases. Making extra principal payments saves significant interest. This differs from compound interest but also from pure "simple interest" in the educational sense.
Can simple interest ever beat compound interest?
Only if compound interest rate is significantly lower. Example: 8% simple vs 2% compound—simple wins. But at equal rates, compound always wins long-term. For short periods (under 1 year), the difference is small. Always compare effective annual rates when choosing products.