 # What is Simple Interest?

If you are looking for a better understanding of interest, you should know what simple interests are. These are interest rates that continue to accrue on the principal amount, in addition to any interest that has already accrued. This type of interest is often associated with loans and certain investment vehicles, such as certificates of deposit. In a one-year CD at 3% APY, for example, you would earn \$3,000 in interest income and another \$1,500 in gains. Once you understand simple interest, you can confidently discuss your loan options with your bank.

#### Simple interest is a type of interest that continues to accrue in addition to whatever interest has already accrued on the principal.

A simple interest loan continues to accrue interest daily, in addition to the principal balance, on the current unpaid balance. A monthly payment will first pay down the accrued interest, then apply to the principal and any applicable fees. The daily interest rate will be calculated by multiplying the principal amount by the number of days between payments.

When considering a loan, it’s important to understand the difference between simple interest and compound interest. Compound interest is usually the better option, as it saves you money over the life of the loan. On the other hand, simple interest is easier to calculate, since the interest accrued on the principal remains the same. For instance, a student can borrow \$18,000 to pay for college and pay it back in three years.

A loan may contain an acceleration clause, which gives the lender the right to call all sums due before a fixed payment date. This clause can be triggered by a sale, default, or assignment. Acknowledgement is a legal term that means “I agree to be bound by the terms of the offer” or “I’m committing to the terms of the agreement.”

## It doesn’t accrue over time

Compound interest and simple interest have different purposes. Compound interest accrues on the principal and the interest paid on it. Both methods generate interest, but compounding is more beneficial for investments, while simple interest is better for debts. The main difference between the two is the amount of time it takes to pay off a debt. Compound interest can be a challenge to repay, while simple interest earns interest continuously and is more reliable for debts.

Simple interest is a term you might have heard of but may not know the meaning of. It is the interest charged on the original amount of money borrowed or deposited. It is calculated by multiplying the interest rate by the principal amount over a period of time. Because simple interest doesn’t accrue over time, your investment grows at a slower rate than compound interest. For more information on simple interest, visit the Insider’s Investing Reference library.

## It’s easier to calculate

The difference between compound and simple interest lies in the method used to calculate them. Compound interest is more complex and involves complicated formulas, while simple interest only considers the amount of principal in a loan. For example, if you make a \$100 deposit in a savings account, you will earn 2% in interest over the next year. In this way, compound interest is more beneficial to you because you can keep your money in the account for longer.

If your loan company charges 5% interest, you should know how much you will end up paying back in the end. Simple interest is easier to calculate because it only consists of three components: the principal borrowed, the interest rate, and the term. A car loan at 4.5% interest will take 5.5 years to pay off. Similarly, a loan for a home at 5% interest will take more than a year to pay off.