what is simple interest 
simple interest is an interest charge that borrowers pay lenders for a loan it is calculated using the principal only and does not include compounding interest simple interest relates not just to certain loans it s also the type of interest that banks pay customers on their savings accounts the formula to determine simple interest is an easy one just multiply the loan s principal amount by the annual interest rate by the term of the loan in years this type of interest usually applies to automobile loans or short term loans although some mortgages use this calculation method investopedia nez riazunderstanding simple interestinterest is the cost of borrowing money typically expressed as a percentage it amounts to a fee or charge that the borrower pays the lender for the financed sum simple interest is an easy way to look at the charge you ll pay for borrowing the interest rate is calculated against the principal amount and that amount never changes as long as you make payments on time neither compounding interest nor calculation of the interest rate against a growing total balance is involved that means you ll always pay less interest with a simple interest loan than a compound interest loan if the loan term is greater than one year many debt transactions involve a more complex calculation of interest than simple interest simple interest is better for borrowers because it doesn t account for compound interest on the other hand compound interest is a key to building wealth for investors simple interest formulathe formula for simple interest is straightforward simple interest p r n where p principal r interest rate n term of loan in years begin aligned text simple interest p times r times n textbf where p text principal r text interest rate n text term of loan in years end aligned simple interest p r nwhere p principalr interest raten term of loan in years example of simple interestas a reminder simple interest paid or received over a certain period is a fixed percentage of the principal amount that was borrowed or lent for example let s say that a student obtains a simple interest loan to pay for one year of college tuition the loan amount is 18 000 the annual interest rate on the loan is 6 the term of the loan is three years using the simple interest formula above the amount of simple interest on the student s loan is 18 000 0 06 3 3 240 begin aligned 18 000 times 0 06 times 3 3 240 end aligned 18 000 0 06 3 3 240 therefore the total amount of principal and interest paid to the lender is 18 000 3 240 21 240 begin aligned 18 000 3 240 21 240 end aligned 18 000 3 240 21 240 simple interest is similar to daily simple interest except that with the latter interest accrues daily and is added to your account balance also while loan balances on simple interest debt are reduced on the payment due date daily simple interest loan balances are reduced on the day payments are received 1