What is simple interest?
Simple interest is calculated only on the original principal amount. It's computed as principal × rate × time, so the same interest charge repeats each period without compounding.
Simple vs compound interest: what's the difference?
Simple interest is charged on the original principal only. Compound interest is charged on the principal plus previously earned interest, so it grows faster over time.
Where is simple interest used?
Simple interest is common on short-term loans, some auto loans, personal loans, and money market products. Most credit cards and long-term mortgages use compound interest.
Are most car loans simple interest?
Yes. Most auto loans use simple (precomputed) interest, meaning every payment reduces the balance and the interest is based only on the outstanding principal. Paying early saves interest.
How do I calculate simple interest?
Multiply the principal by the annual rate (as a decimal) and the time in years. For example, $10,000 at 5% for 3 years is $10,000 × 0.05 × 3 = $1,500.
Is simple interest good or bad for a borrower?
Simple interest is generally better for a borrower than compound interest because the total cost is lower over the same term, provided you stick to the repayment schedule.