Simple Interest

What is simple interest?

Interest is the fee you pay for borrowing money, usually expressed as a percentage of the total loan amount. Simple interest is calculated solely on the original amount borrowed, also known as the principal. For example, if you borrow $100 with a simple interest rate of 5%, you'll pay $5 in interest each year. 

How is simple interest different from compound interest? 

While simple interest calculates interest only on the original amount borrowed or invested, compound interest includes the interest has been accrued over time. 

Over long periods of time, compound interest can significantly amplify the growth of an investment or the accumulation of debt. 

When is simple interest used? 

Simple interest is typically used for short-term loans or investments with fixed terms, such as personal loans or car loans. It's also commonly applied to savings accounts or certificates of deposit where the money is deposited for a short period, usually one year or less.