Simple Interest
Definition
Interest calculated only on the principal, not on accumulated interest. Simple interest equals Principal × Rate × Time. A $1,000 loan at 5% simple interest for 3 years equals $1,000 × 0.05 × 3 equals $150 interest. Opposite of compound interest.
Why It Matters
Simple interest is rare in modern finance. Most loans and investments use compound interest. But understanding simple interest teaches how interest works before compounding complicates it.
Example
$10,000 at 5% simple interest for 10 years: $10,000 × 0.05 × 10 equals $5,000 interest equals $15,000 total. Same amount with 5% compound annually: $16,289. Compounding beats simple interest.