Investing
Simple Interest
Interest calculated only on the original principal amount.
Definition
Simple interest is a method of calculating interest where the interest charge is based only on the original principal amount. Unlike compound interest, simple interest does not factor in previously accumulated interest. The formula is I = P × r × t, where P is the principal, r is the annual interest rate, and t is the time period in years. Simple interest is commonly used for short-term loans, auto loans, and some bonds. While easier to calculate, it results in less total interest earned (or paid) compared to compound interest over the same period.