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 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:
You can see that there is a slight difference from "interest on interest".
To learn more about compound interest calculation, check out How to calculate compound interest in Excel.