Why every year earns the same interest
Simple interest is always figured on the starting amount, P. That never changes, so every year adds the same amount of interest.
One year of interest is P × r. Multiply by the number of years, t, and you have I = P × r × t.
Remember, the I in the formula is only the interest. On a loan, you pay back P + I. In a savings account, your money grows to P + I.
Bottom line: find one year’s interest, multiply by the years, then check whether the question wants I or P + I.
Example 1: a car loan
You borrow $8,000 for a used car. The loan charges 7% simple interest a year for 4 years. How much interest do you pay? How much do you pay back in all?
The working
- Write the formula: I = P × r × t
- Change the rate to a decimal: 7% = 0.07
- Multiply: I = 8,000 × 0.07 × 4 = 2,240
- Add the principal for the total: 8,000 + 2,240 = 10,240
Answer: $2,240 in interest, $10,240 in all
Simple interest calculator
Try your own numbers. It starts with the car loan above and shows the working line, so you can check each step of yours.
Simple interest: I = P × r × t
Type the starting amount, the yearly rate and the time. Nothing you type is saved.
The amount you borrow or save.
Goes in as a decimal: r = 0.07
t = 4 years
Interest: $2,240. Total: $10,240.
- Interest, I
- $2,240
- Total to pay back, P + I
- $10,240
On savings, the total is what the account grows to.
The working
I = 8,000 × 0.07 × 4 = 2,240
P + I = 8,000 + 2,240 = 10,240
Example 2: a payment plan in months
Store deals often give the time in months. The rate is still yearly, so change the months to years first.
A furniture store sells a $1,200 couch on a payment plan. The plan charges 8% simple interest a year, and you pay it off in 18 months. What is the total cost of the couch?
The working
- Change the months to years: t = 18 ÷ 12 = 1.5
- Change the rate to a decimal: 8% = 0.08
- Multiply: I = 1,200 × 0.08 × 1.5 = 144
- The question asks for the total cost, so add: 1,200 + 144 = 1,344
Answer: $1,344
Example 3: work backward to the rate
Some questions give you the interest and ask for the rate or the time. It’s the same formula, run backward.
You put $2,500 in a savings account that pays simple interest. After 3 years, you’ve earned $225. What is the yearly interest rate?
The working
- Put in what you know: 225 = 2,500 × r × 3
- Multiply the numbers you know: 2,500 × 3 = 7,500, so 225 = 7,500 × r
- Divide both sides by 7,500: r = 225 ÷ 7,500 = 0.03
- Change the decimal to a percent: 0.03 = 3%
- Check it: 2,500 × 0.03 × 3 = 225
Answer: 3% a year
The compound interest formula (not on the sheet)
Compound interest isn’t on the formula sheet, but its questions do appear. So learn this one:
A = P(1 + r/n)nt
A is the total at the end, interest included. n is how many times a year the interest is added: 1 for yearly, 12 for monthly. P, r and t mean the same as before.
Here’s the difference. Compound interest earns interest on its interest. Simple interest never does.
You put $5,000 in an account that pays 4% interest, compounded once a year. How much is in it after 2 years?
The working
- Fill in what you know. P is 5,000, r is 0.04, n is 1 and t is 2.
- Work inside the parentheses: 1 + 0.04 ÷ 1 = 1.04
- The power is n × t, which is 2: 1.04² = 1.0816
- Multiply: A = 5,000 × 1.0816 = 5,408
Answer: $5,408
Simple interest on the same money gives $5,400. Compounding earns $8 more, because year 2 also earns interest on year 1’s $200.
3 mistakes that cost points
Mistake 1: using 5 instead of 0.05
Divide the rate by 100 before it goes in. $600 at 5% for 2 years earns 600 × 0.05 × 2 = 60, so $60. Use 5 and you get $6,000, a hundred times too much.
Mistake 2: leaving months as months
The rate is per year, so the time has to be in years too. Divide the months by 12: 9 months is 0.75 years.
$800 at 6% for 9 months earns 800 × 0.06 × 0.75 = 36, so $36. Put in 9 and you get $432.
Mistake 3: giving the interest when they want the total
Read the last line of the question again. “How much interest?” wants I. “How much is paid back?” or “How much is in the account?” wants P + I.
On a $3,000 loan with $450 in interest, that’s $450 or $3,450. Both can show up as choices, so check which one the question asked for.
Practice: 5 new questions
Every set is new. Check each answer as you go, and read the working on any you miss before the next one.
Simple interest with I = Prt: 5 questions
- Questions
- 5
- Timer
- None
- No calculator
- None
New questions every time you start. Do this set as many times as you like.
- Check each answer as you go and read the working before the next question.
- The formula sheet and calculator sit in the toolbar, as they do on the real test.
No account or email needed.
Want more? Practice all of fractions, decimals and percents (25 questions, every skill in the topic), or take the full GED math practice test.
Frequently asked questions
What is the simple interest on $1,000 at 5% a year for 3 years?
It's $150. Write 5% as 0.05, then multiply: 1,000 × 0.05 × 3 = 150. That's $50 for each of the 3 years. If the question asks for the total paid back or saved, add the principal: $1,000 + $150 = $1,150.
What is 4% interest on $10,000?
It's $400 for one year. Write 4% as 0.04 and multiply: 10,000 × 0.04 = 400. A rate is yearly unless the question says otherwise, so multiply by the years too. Over 3 years of simple interest, that's 10,000 × 0.04 × 3 = $1,200.
Keep going
How to calculate percentages
The skill under every interest question: one formula for the part, the percent or the whole.
GED math formula sheet
Simple interest is on it and compound interest isn't. See the other formulas it leaves out.
GED math word problems
15 solved step by step, including a savings account, sales tax and a rent increase.
The GED calculator, explained
The TI-30XS keys that matter on test day, from the % key to ANS.
Written by
Coach Crissy
Math instructor
Coach Crissy teaches the video lessons behind the BooknBoost GED math course, working through GED-style problems on camera: ratios and proportions, percent and interest, mean, median and mode, slope, and the geometry students meet on test day.