Understand Personal Finance

Learn personal financial management, budgeting, and investing.

# Super easy ways to learn everything about SIMPLE INTEREST

Simple interest is the interest amount calculated on the principal amount of the liability or loan or the original contribution to a savings account. It is unlike compound interest which requires interest on interest. It shows that the account holder should pay interest on the principal amount that he has taken.

## Who gives loans on the basis of simple interest?

Various loans rarely use simple interest calculations. They often use compound interest to calculate the loan. However certain short-term personal loans, and auto loans use this method of simple interest. Besides, a handful of mortgages like biweekly mortgages also calculate interest on this basis to help their borrowers to pay their home off faster because paying the interest more quickly accelerates the pay-off date.

Simple interest is rare in the savings account as most savings account uses compound interest methods to calculate the interest.

In the procedure of simple interest, the lender tries to pay out the interest of a month first. The rest of the amount is reduced from the principal amount that he took.

Paying the loan in time is often required as if the person will pay their loans late, then he has to cover the additional interest and have to pay the additional money with keeping the loan’s specified payoff date.

## How to calculate simple interest?

The formula to calculate the simple interest is

Principal amount*Rate of interest*Term of the interest / 100

So, SI= P*R*T / 100

The final amount is calculated as the principal + Simple interest

So A=P+SI

#### Example

For example, Gourav has taken 50,000 rupees for the period of 5 years with an interest of 3%.

So as per the formula, the simple interest is 50000*5*3/100 which equals 7500.

So he has to pay 7500 in total as interest.

The final amount he has to pay to the bank is 50000+7500=57500.

## Who benefits from simple interest?

As the simple interest is calculated on a daily basis, the simple interest benefits the consumer who pays their loans on time.

So if you pay your loan amount early in the month, it helps you by shrinking your payable principal amount sooner and you can pay the loan sooner than the original estimated date.

Conversely, if you pay the loan late, most of your payment goes toward interest than if you pay on time. Likewise, if you always pay late consistently, your final amount exceeds the original amount as you did not pay down the principal at the expected rate.

## Why is simple interest so simple?

Simple interest basically refers to the straightforward crediting of cash flows associated with some investment or deposit. Simple interest does not take into account the interest-on-interest or the power of compounding. Simple interest is so simple to calculate and pay than compound interest.

## Simple interest vs compound interest

Interest is generally of two types, simple interest, and compound interest. Simple interest is generally calculated on the deposits or original principal amount of a loan.

On the other hand, compound interest is based on the principal amount and the amount of interest accumulated. So it refers to the interest on interest.

Simple interest is much easier to calculate than compound interest. Compound interest generally pays more after the first payment period whereas simple interest always remains the same until the end of the loan period. compound interest is a great Borden for people which generally piles up in time and becomes oppressive with longer loan terms.