How to use the Complete Guide to Simple Interest
Simple interest is the most basic form of interest. You pay (or earn) interest only on the principal amount you started with. It's straightforward, predictable, and—unlike compound interest—it doesn't grow exponentially out of control.
📊 The Formula
I = P × r × t (Interest = Principal × Rate × Time). If you borrow $1,000 at 5% for 2 years, you pay $100. Simple.
🚗 Borrower's Friend
As a borrower, you generally want simple interest (like in auto loans). As a saver/investor, you want compound interest to grow your wealth faster.
⚖️ Pros & Cons
- ✅ Easy to calculate: You know exactly what you owe.
- ✅ Lower cost: Cheaper than compound interest loans.
- ❌ Lower returns: Bad for savings accounts compared to compounding.
- ❌ Uncommon: Most modern loans differ to compound interest.
The Formula
Total (A) = P(1 + rt) | Interest (I) = P × r × t
Simple Interest Calculation Example
| Year | Principal | Interest (10%) | Total |
|---|---|---|---|
| 1 | $10,000 | $1,000 | $11,000 |
| 2 | $10,000 | $1,000 | $12,000 |
| 3 | $10,000 | $1,000 | $13,000 |
Note: Interest is always calculated on the original $10,000 principal, not on accumulated totals.