What is Simple Interest?
Simple interest is a financial calculation method where interest is generated only on the original principal, without considering accumulated interest from previous periods.
Simple Interest Formula
The formula is: I = P × r × t
Where:
- I = Interest earned
- P = Principal (initial amount)
- r = Annual interest rate (as decimal)
- t = Time in years
Example: If you invest $10,000 at 5% annual for 2 years:
- I = $10,000 × 0.05 × 2 = $1,000
- Total amount: $10,000 + $1,000 = $11,000
Simple vs Compound Interest
| Feature | Simple | Compound | |---|---|---| | Calculation base | Original principal only | Principal + accumulated interest | | Growth | Linear | Exponential | | Returns | Lower long-term | Higher long-term |
When is Simple Interest Used?
- Short-term loans
- Promissory notes
- Some savings accounts
- Fixed-term investments
- Legal interest calculations