Our simple interest calculator calculates a monthly payment on an interest-only loan. Just provide the interest percentage and you'll know how much that loan costs.
The difference between "just" interest and mortgage payment is simple - with the mortgage calculator, every month you repay a part of the principal and your loan balance gets lower an lower. With the simple interest calculator, only the interest is paid. The loan amount stays the same forever. Nothing changes with time, so we didn't include a field that would specify your loan's duration.
Simple interest can be used in both situations - when you borrow or lend money. In the former case, the interest is added to a separate pile of money each month (and is not a subject to extra interest next month).
Simple interest formula
Well, it's really simple:
interest = amount * interest_rate.
How to calculate simple interest
- Take the original amount. For example
- Take the interest rate and divide it by one hundred.
5% = 0.05.
- Multiply the amount by the interest rate.
$1000 * 0.05 = $50'. That's the annual interest rate.
- To get a monthly interest, divide it further by
$50 / 12 = $4.17.
An example of simple interest in practice
$1000000 and intend to use it to provide a steady income - you don't want to spend it, nor invest it. You put it into a bank account with 5% annual interest rate. Every year, you get
$50000 (5% of $1 million). Every month, you'll receive
$4166.67 (1/12 of $50000). No matter how much time passes, you'll still have $1 million on that account.
An alternative - compound interest
But what if you were to leave that extra cash on the account? Than that interest would keep working for you and every month the balance on the account would increase (and the whole thing would become an investment. To make it simple, let's assume that the interest compounds annually (is added once per year).
- at the end of the first year, you'd have
$1,050,000($1 million plus 5%).
- at the end of the second year, you'd have
$1,102,500($1050000 plus 5%).
- 3rd year -
- 10th year -
- 50th year -
- 100th year -
Now that's something, isn't it? You wouldn't get your $4166 every month, but you'd have 131 times more in the bank.