DEFINITION of 'Simple Interest'
A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate by the principal by the number of periods.
Where:
P is the loan amount
I is the interest rate
N is the duration of the loan, using number of periods
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BREAKING DOWN 'Simple Interest'
Simple interest is called simple because it ignores the effects of compounding. The interest charge is always based on the original principal, so interest on interest is not included. This method may be used to find the interest charge for shortterm loans, where ignoring compounding is less of an issue.
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