How this instrument works
Simple interest is computed once, on the amount you started with. The rate r is a percentage of the principal charged per year, so dividing by 100 turns it into a plain fraction; multiply by the principal P for a single year's charge, then by the number of years t for the whole run. That is the entire formula: I = P·r·t/100. Nothing in it refers to money already accrued, which is exactly the point — the base never moves.
Because that base is frozen, the balance grows in a straight line. On the default sheet — $10,000 at 5% for 3 years — each year adds exactly $500, so the balance is a ramp rather than a curve. Annual compounding on identical terms would add $500, then $525, then $551.25, finishing $76.25 ahead. Across three years that gap is small change; stretch it to thirty and the same $10,000 earns $15,000 the simple way against roughly $33,219 the compounding way.
This is not a historical curiosity. Most US car loans and personal instalment notes accrue this way on the outstanding balance, Treasury bills and many bond coupons pay it, and statutory penalties on unpaid invoices are almost always written as a flat percentage of the original sum per year. Whenever a contract quotes a rate without the word compounded, this arithmetic is what it means.
- Enter the Principal — the sum lent, borrowed or deposited before any charge is added.
- Set Rate, %/yr to the annual percentage written in the contract: type 5, not 0.05.
- Put the term in the Years field. Fractions are fine — eighteen months is 1.5.
- Read Interest earned for the charge alone, and Total after interest for principal plus charge.
Worked example — $10,000 lent for three years
You lend a contractor $10,000 for a three-year shop fit-out at a flat 5% a year, written into the note as simple interest. Substituting straight into the formula: I = 10,000 × 5 × 3 ⁄ 100 = 150,000 ⁄ 100 = $1,500. The repayment due at the end is A = 10,000 + 1,500 = $11,500 — five hundred dollars a year, three times over, and not a cent more.
Double the term to six years and the charge doubles too, to exactly $3,000, because the formula is linear in t. That linearity is the useful tell: if a lender's figure grows faster than the term does, something in the contract is compounding, and it is worth asking on what period it rests.
Questions
What is the difference between simple and compound interest?
Simple interest is charged on the original principal only; compounding charges on the principal plus everything already added. On $10,000 at 5% for three years the two differ by $76.25 — $1,500 against $1,576.25. The gap widens fast with time: at thirty years it is $15,000 against roughly $33,219. If a contract does not use the word compounded, it usually means the simple version.
How do I enter a term that is not a whole number of years?
Type it as a decimal in the Years field. Six months is 0.5, eighteen months is 1.5, ninety days is 90 ÷ 365 = 0.247. The formula is linear in time, so a fractional year returns exactly the proportional share of one year's charge — no rounding rules and no day-count conventions to argue about.
Is simple interest always cheaper for the borrower?
For the same quoted rate and term, yes — the base never grows, so the total is lower than any compounding schedule. That is why the structure matters more than the headline number: 6% simple over five years costs 30% of the principal, while 5.5% compounded monthly over the same five years costs about 31.6%. Compare the totals, not the percentages.
Which loans actually use simple interest?
Most US auto loans and personal instalment loans accrue it daily on the outstanding balance, as do Treasury bills and many corporate bond coupons. Statutory late-payment charges on invoices are usually written the same way. Credit cards and savings accounts compound instead, so read the contract wording rather than assuming from the rate alone.
Why does the formula divide the rate by 100?
Because the Rate field takes a percentage, which is the human form of the number. A 5% rate is the fraction 0.05, and dividing by 100 does that conversion inside the formula. Enter 5 for five percent; entering 0.05 returns one-hundredth of the right answer, which is the most common input mistake on this sheet.
Does inflation change what I actually earn?
It changes the purchasing power, not the arithmetic. This instrument returns nominal figures — the dollars the contract names. Subtract the inflation rate from the quoted rate for a rough real return: 5% nominal during 3% inflation leaves about 2% a year of genuine gain. The $11,500 you receive is exact; what it will buy is not.
References
- CFPB — consumer tools for loans and credit
- TreasuryDirect — Treasury bills and how they pay
- Federal Reserve — supervision and regulation resources
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.