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Finance & Business · pattern A, Numeric fields

Simple interest, and how far it falls behind.

Enter principal, rate and term for simple interest and the total repayable, with the compound equivalent alongside so the divergence is visible.

Inputs

The formula used

I = Prt

Simple interest is charged on the original principal only, never on accumulated interest. It is used for short-term instruments and some student loans.

Interest

675.00

Total repayable
5,675.00
Interest per year
225.00
Interest per month
18.75
Compound equivalent
5,705.83
Extra under compounding
30.83
Effective rate over the term
13.500 %

The gap widens with time, not with the rate.

Over one year simple and compound interest are identical at annual compounding. Over three years at 4.5% the difference is small; over thirty it is dramatic, because compounding is exponential and simple interest is linear. Any question about long horizons is really a question about which of the two applies.

Questions about simple interest

Where is simple interest actually used?
Short-term commercial paper, some car finance, certain government student loans, and most late-payment penalties. Anything over a few years generally compounds.
Is simple interest better for a borrower?
Yes, at the same rate and term — you pay interest only on the original sum. Which is why it is rarely offered on long loans.
How do I convert between the two?
You cannot directly; they are different products. Compute both totals and compare, which the panel does.

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