Simple Interest
Intérêt simple in French
Quick definition
Simple interest is interest calculated only on the original principal, never on interest already earned or charged. The formula is I = P x r x t: principal times rate times time. It grows in a straight line, unlike compound interest.
The formula: I = P x r x t
Simple interest touches only the principal. Multiply the amount by the annual rate, then by the time in years, and you have the total interest. Nothing else enters the calculation: interest never lands on the balance and never earns interest of its own.
Lend $5,000 at 6% simple interest for 3 years: I = 5,000 x 0.06 x 3 = $900. Each year contributes exactly $300, whether it is year one or year thirty. The growth is a straight line with no curve to it.
Where simple interest actually shows up in Canada
Pure simple interest is rarer than the textbooks suggest, but it does appear. Some short-term consumer loans and payday-style lenders quote their cost as a flat fee per amount borrowed, which is simple interest arithmetic. Bond investors meet it in accrued interest: the coupon that builds up between semi-annual payment dates accrues on a simple, day-count basis until it is paid out.
Interest charged on certain government balances, such as amounts owing on tax instalments, is calculated in a way that behaves much like simple interest applied to each outstanding amount. And promotional financing, the "equal payments, no interest for 12 months" variety, often reverts to a simple flat charge on the original amount if the balance is not cleared in time.
Simple vs. compound: the gap grows with time
The contrast with compound interest is invisible at first and enormous later. Over one year, the two are identical. Over decades, compounding pulls away because every year's interest starts earning interest of its own, while simple interest keeps adding the same flat amount.
| After | Simple interest | Compound (annual) |
|---|---|---|
| 1 year | $10,500 | $10,500 |
| 5 years | $12,500 | $12,763 |
| 10 years | $15,000 | $16,289 |
| 20 years | $20,000 | $26,533 |
Why "simple" sounds cheaper but rarely is
Because simple interest grows slowly, a loan advertised in simple terms can sound gentle. The catch is that most simple-interest lending is short term, and short terms hide high effective rates. A fee of $15 per $100 borrowed for two weeks sounds like 15%, but there are 26 two-week periods in a year: repeated all year, that pace works out to an annualized cost in the hundreds of percent. This is exactly how a payday loan can be ruinously expensive while quoting a number that sounds modest.
The honest comparison is always the same: convert any quoted cost to an effective annual rate before deciding. A low-sounding flat fee over a short window often beats a scary-sounding annual rate only in appearance.
In Canada
Canadian savings products almost never pay simple interest: high-interest savings accounts calculate daily and pay monthly, GICs typically compound annually. Where Canadians actually meet simple interest is on the borrowing side of short-term credit and in bond accrual math.
Provinces cap the cost of payday lending at a maximum charge per $100 borrowed, a cap expressed in simple-interest style precisely because the loans are too short for annual rates to feel meaningful to borrowers. The federal criminal interest rate, by contrast, is defined as an effective annual rate, which is the lens that makes short-term costs comparable to everything else.
Worked example
Amir lends his brother $12,000 to buy a car, and they agree on 4% simple interest over 5 years. The interest is 12,000 x 0.04 x 5 = $2,400, so his brother repays $14,400 in total, $240 of interest per year. Had they agreed on 4% compounded annually instead, the total interest would be about $2,600. Over 5 years the difference is modest; over 25 years, the compound version would charge roughly $20,000 of interest against the simple version's $12,000.
Related terms
Reviewed by Alexandre Bernier, CFP®, CIM®, PFP®·Updated August 2026