How it works
Simple interest is charged only on the original principal, never on accumulated interest. It grows in a straight line: the same dollar amount every year.
It is used for many short-term loans, some auto loans, bond coupons, and as a quick estimate. Most savings accounts and credit cards use compound interest instead.
Formula
I = P × r × t; total A = P(1 + rt)
Questions people ask
How is simple interest different from compound interest?
Simple interest is calculated on the principal only. Compound interest is calculated on principal plus interest already earned, so it grows faster over time.
How do I calculate simple interest for months?
Divide the number of months by 12 to get years, then use I = P × r × t. For days, divide by 365 (or 360 if your lender uses that convention).
Do car loans use simple interest?
Many do, in the sense that interest accrues daily on the current balance. Because the balance falls as you pay, the total still matches a standard amortization when you pay on time.