What is simple interest?
Simple interest is a method of calculating interest where the interest charge is applied only to the original principal amount. Unlike compound interest, you do not earn "interest on interest". The interest amount remains constant every year.
The formula is: Simple Interest = P × R × T / 100, where P is the principal amount, R is the annual interest rate, and T is the time in years. The total amount is simply Principal + Interest.
Where is simple interest used?
Simple interest is commonly used in:
Simple interest vs compound interest
The key difference is that simple interest is calculated only on the original principal, while compound interest is calculated on the principal plus accumulated interest. For short periods (1-2 years), the difference is small. Over longer periods, compounding creates exponentially larger returns. Most savings accounts, FDs with reinvestment, and long-term investments use compound interest, while most short-term loans use simple interest.