The formula
Where P is the principal, r the annual rate as a decimal, and t the time in years. The total repayable is simply the principal plus that interest.
₹10,000 at 8% for five years earns ₹4,000 in simple interest, for a total of ₹14,000. Every year earns exactly ₹800 — the amount never changes, because it is always calculated on the original ₹10,000.
Why the comparison matters
The same ₹10,000 at 8% compounded annually reaches ₹14,693 over five years. The gap is small at first and widens without limit.
Stretch it to thirty years and simple interest gives ₹34,000 while compounding gives ₹1,00,627 — roughly three times as much from identical inputs. That divergence is why the chart above plots both lines rather than one.
The practical rule follows directly: you want simple interest when you are borrowing and compound interest when you are lending or investing.
Where simple interest is actually used
It is less common than compound interest but far from obsolete.
Car and personal loans in many markets are quoted on a simple interest basis, which is genuinely better for the borrower than a compounding equivalent at the same rate.
Short-term and bridging loans often use it because the term is too short for compounding to matter much.
Certain deposits and bonds pay simple interest when the interest is paid out rather than reinvested — a bond paying an annual coupon into your bank account is effectively simple interest unless you reinvest it yourself.
That last case is worth noticing: whether something compounds is often a question of what you do with the payments, not what the product does.
Reading a rate honestly
Because simple and compound interest produce different totals from the same headline rate, a quoted percentage tells you very little on its own. Two loans at "12%" can cost materially different amounts.
Always compare the total repayable, or the effective annual rate, rather than the nominal figure. For borrowing, that is the APR; for saving, the AER or APY. Those numbers are constructed precisely so that different compounding conventions can be compared on equal terms.
Frequently asked questions
How do I calculate simple interest?
Multiply the principal by the annual rate and by the time in years: Interest = P x r x t. Rs 10,000 at 8% for five years earns Rs 4,000, for a total of Rs 14,000.
What is the difference between simple and compound interest?
Simple interest is calculated only on the original principal, so it grows in a straight line. Compound interest is calculated on the principal plus interest already earned, so it curves upward. Over 30 years at 8%, Rs 10,000 becomes Rs 34,000 with simple interest and about Rs 1,00,627 with annual compounding.
Is simple interest better for the borrower?
Yes, at the same rate. Because interest never accrues on unpaid interest, a simple-interest loan costs less than a compounding one at the same nominal rate. That is why simple interest is preferable when borrowing and compound interest when investing.
Which loans use simple interest?
Many car loans and personal loans are quoted on a simple interest basis, as are most short-term and bridging loans. Bonds paying a coupon into your account are also effectively simple interest, unless you reinvest the coupons yourself.