What is simple interest? How it works and how it differs from compound
By SendPay Business · · 2 min read
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Simple interest is interest worked out only on the original amount, not on interest already earned. It is the easiest kind of interest to calculate, and a useful starting point for understanding how savings and loans grow.
The formula
- Interest = amount × yearly rate × time in years.
- £2,000 at 4% for 2 years: 2,000 × 0.04 × 2 = £160.
- For months, divide by 12; for days, divide by the number of days in the year the agreement uses (often 365).
Simple versus compound
Compound interest adds each period's interest to the balance, so later interest is earned on a bigger sum. At 5% a year, £1,000 earns £500 of simple interest over 10 years but about £629 if the interest is compounded yearly. The longer the time, the wider the gap.
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Where it is used
Simple interest is common on short-term loans, some car finance, many bonds (whose coupons are a fixed share of the face value), and statutory interest on late payments. Most savings accounts and credit cards compound instead, so check how a product works out its interest.
Reading the rate
When comparing products, look at the annual equivalent rate (AER) for savings or the APR for borrowing. These turn different ways of charging or paying interest into a single yearly figure you can compare.
Where SendPay fits
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Questions people ask
How do I work out simple interest?
Enter the amount, rate and time into the free calculator.
Simple interest calculator →What is compound interest?
Interest earned on interest as well as the original amount.
What is compound interest? →What is the time value of money?
Why money today is worth more than the same amount later.
Time value of money →Read next
Spotted a mistake or something out of date? and we'll fix it. How our guides are made
This guide is general information, not legal or financial advice. SendPay Business is a technology company, not a bank, and does not take deposits; regulated services on the platforms are provided by licensed partners. Other companies named in this guide are reference points only and are not affiliated with SendPay Business.