Simple interest is the sum charged by a lender, or that an investor receives, for the use of money. It is the basis for determining earnings on savings accounts, certificates of deposit, and money market accounts. Simple interest also is used in calculating the interest rate on debts like credit card balances and mortgages. When you see a simple interest rate, it’s expressed as an annual percentage. That’s of limited value if you want to know how much interest will be charged (or earned) for another time period like the monthly interest on a credit card. It's easy, however, to calculate the percentage of simple interest for any length of time.
Calculate the percentage of simple interest for a single month. This is the rate that is used to figure most loan payment interest and earnings on many CDs. Do this by dividing the annual rate by 12. For example, if a CD pays 4.80 percent annual interests, the monthly simple interest rate is 4.80 percent divided by 12, or 0.40 percent.
Use the percentage of simple interest for a single day as the basis for finding the rate for periods other than monthly. Find the daily rate by dividing the annual rate by 365 (the number of days in one year). Suppose you are paying 14.60 percent on a credit card. The daily interest rate is 14.60 percent divided by 365 or 0.04 percent interest per day.
Multiply the percentage of simple interest for one day by the number of days in the time period. This is useful for calculating the percentage of simple interest for money market accounts, where interest is usually figured weekly. For instance, if you are earning 4.38 percent annual simple interest on a money market account, then divide 4.38 percent by 365, then multiply the result by 7 days to arrive at the answer of 0.084 percent per week.
Don’t confuse annual percentage rate (APR) with simple interest. APR is actually a legally required figure that estimates how much the effective interest rate on loans is by the time other fees are added to the simple interest charged on the balance of a debt.
- Don't confuse annual percentage rate (APR) with simple interest. APR is actually a legally required figure that estimates how much the effective interest rate on loans is by the time other fees are added to the simple interest charged on the balance of a debt.
Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.