How to Calculate Loan Interest: Simple vs. Compound

I = P × r × t. P = principal, r = annual rate (decimal), t = time in years.

Example: a $10,000 loan at 6% simple interest for 3 years. I = 10,000 × 0.06 × 3 = $1,800. Total repayment = $11,800.

Simple interest is rare for consumer loans. You mainly see it on some short-term personal loans, Treasury bills, and car loans (where it is called "pre-computed" interest).

A = P(1 + r/n)^(nt). A = total amount owed, n = compounding periods per year.

Same $10,000 at 6% compounded monthly for 3 years: A = 10,000 × (1 + 0.06/12)^(12×3) = 10,000 × (1.005)^36 = $11,967. Interest = $1,967.

That is $167 more than simple interest — and the gap widens with time and rate.

Most loans (mortgages, auto, student) are fully amortised: you make equal monthly payments that cover both interest and principal.

Each month, interest is calculated on the remaining balance. Early payments are mostly interest; later payments are mostly principal.

The Loan Calculator shows this split for any loan amount, rate, and term.

Make extra payments toward principal. Even $50/month extra on a $200,000 mortgage can save thousands.

Refinance to a lower rate when possible. A 1% rate reduction on $150,000 over 30 years saves roughly $30,000.

Choose the shortest term you can afford. A 36-month auto loan costs far less in interest than a 72-month loan, even at the same rate.

Pay biweekly instead of monthly. You make 26 half-payments (= 13 full payments) per year instead of 12.

Credit cards compound daily on the average daily balance, and APRs are typically 18–29%. A $5,000 balance at 24% APR compounded daily costs about $1,300 in interest per year if you only pay the minimum.

This is why paying off credit card debt should almost always take priority over other financial goals (except capturing a 401(k) match). Use the Debt Payoff Calculator to build a payoff plan.