Definition For Simple Interest

Interest calculated as a percent of the original loan.

Definition for simple interest. Simple interest is calculated on the principal or original amount of a loan. However it does not take into account the effects of compounding which is the process of earning interest on principal plus interest that was earned earlier. Simple interest represents a fee you pay on a loan or income you earn on deposits. Simple interest 0 03 x 1 000 30.

Simple interest is an easy method of calculating the interest for a loan principal amount. You must repay the amount you borrowed and make extra payments for interest which represents the cost of borrowing. If you borrow 1 000 at 12 per annum simple interest without paying back any capital the interest is 120 at the end of each and every year. A 3 year loan of 1 000 at 10 costs 3 lots of 10 so the interest is 3 1 000 10 300 simple interest is almost never used in the real world with compound interest being preferred.

Simple interest is determined by multiplying the daily interest rate by the principal by the number of days. Simple interest is a concept which is used in most of the sectors such as banking finance automobile and so on. Interest paid or computed on the original principal only of a loan or on the amount of an account examples of simple interest in a sentence recent examples on the web few college students completed a course in personal finance while in high school and three out of four young people in america cannot calculate the simple interest on a loan. Generally simple interest paid or received over a certain period is a fixed percentage of the principal amount that was borrowed or lent.

For example say a student obtains a simple interest loan. This means it can dramatically understate the. Simple interest is a calculation of interest that doesn t take into account the effect of compounding. Simple interest is a quick and easy method of calculating the interest charge on a loan.

Interest that is calculated only on the amount of money invested or borrowed and not on the interest that has already been added to it. Why simple interest is important. Simple interest is a handy easy tool for estimating the interest earned or paid on a certain balance in one period.