In this guide, we’re going to show you how to calculate simple interest in Excel.

## What is Simple interest?

Simple interest is the most basic approach to calculate the amount earned from an investment or payment of a loan. Simple interest method assumes that the principal and the interest rates remain the same during the entire period of the investment or loan. The interest amount at the end of the period is ignored. Thus, there is no compounding.

## Calculating simple interest

Simple interest calculation is a simple multiplication with three values:

• P: principal
• I: interest rate
• N: number of periods For example, if you invest \$100 for 5 years at an 4% annual interest rate. The simple interest will be:

\$100 * 4% * 5 = \$20

As a result, the future value becomes,

\$100 + \$20 = \$120

We can formulate the future value as the following: You can apply the same formula into Excel to calculate simple interest.

Simple Interest =Present_Value*Rate*PeriodsFuture Value =Present_Value*(1+Rate*Periods) No matter what approach you use, make sure that the period type and interest rates match. For example, if you want to calculate monthly interest at an annual rate, divide the rate by 12.

## Simple interest vs. Compound interest

Although it is very easy to understand and calculate simple interest, real-life scenarios are usually based on compound interest. Compound interest is an interest calculation approach with a significant difference. You assume that the interest amount is added to the principal balance after each period. Thus, the interest amount will be higher due to that increase at the end of every compounding period.

Here is comparison between simple interest and compound interest by years:

 Time Simple Interest@ 4% Compound Interest@ 4% Start 100 100 1 year \$104.00 \$104.00 2 years \$108.00 \$108.16 5 years \$120.00 \$121.67

You can see that there is a slight difference from "interest on interest".