How Simple Interest Works: An Example Suppose you take out a $5,000 loan at 6% interest for two years. To calculate the amount of interest you will pay, use the simple interest formula above.

Learn what simple interest is and how to calculate it using examples with a simple interest formula. You can also use a simple interest calculator.

For example, if you borrow $1,000 from a friend and agree to pay 6% simple interest for two years, the formula above tells you that you'll pay $120 in total interest ($1,000 x 0.06 x 2).

In the example, half a year is six out of 12 months, which equals 0.5. Multiply the deposit amount by the interest rate by the period of time the deposit earns interest.

But not all interest rates are the same. In the world of finance, you’ll run into two types of interest: simple and compounding. Here’s a helpful overview of simple interest vs. compound interest.

Here’s another simple interest example: If a $10,000 deposit is in an account that earns only 0.15% interest per year, the interest rate would be expressed as 0.0015.

On the surface, an interest rate is just a number. How that number applies to debt or equity opens up a world of possibilities. The first consideration is always whether it’s simple interest vs.

When looking at a narrow time frame like a single bank statement period, the compound interest formula will give similar results to the simple interest formula. Using the same data from the ...