simple interest

A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate by the principal by the number of periods.



Where:
P is the loan amount
I is the interest rate
N is the duration of the loan, using number of periods

Investopedia Says:
Simple interest is called simple because it ignores the effects of compounding. The interest charge is always based on the original principal, so interest on interest is not included. This method may be used to find the interest charge for short-term loans, where ignoring compounding is less of an issue.

Related Links:
Learn the natural log and exponential functions used to calculate this value. Continuously Compound Interest
Find out why time really is money by learning to calculate present and future value. Understanding The Time Value Of Money
Understanding how money is made and lost over time can help you improve your returns. Overcoming Compounding's Dark Side
Learn and ensure the different rates quoted to you by banks and institutions are what they claim to be. APR vs. APY: How the Distinction Affects You

Interest calculation based only on the original principal amount. Simple interest contrasts with Compound Interest, which is applied to principal plus accumulated interest. For example, $100 on deposit at 12% simple interest would yield $12 per year (12% of $100). The same $100 at 12% interest compounded annually would yield $12 interest only in the first year. The second year's interest would be 12% of the first year's accumulated interest and principal of $112, or $13.44. The third year's payment would be 12% of $125.44-the second year's principal plus interest-or $15.05. For computing interest on loans, simple interest is distinguished from various methods of calculating interest on a precomputed basis. See also Precompute; Consumer Credit Protection Act of 1968.

A method of calculating the future value of a sum assuming that interest paid is not compounded, i.e., that interest is paid only on the Principal. See also Compound Interest.
Example: An account is established paying simple interest of 10% on a principal of $1,000. Table 50 shows the current value of the account for the next 5 years.

Table 50 Simple Interest

Year Value

1 $1,100

2 1,200

3 1,300

4 1,400

5 1,500