Simple Interest

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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.

 

Simple Interest

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 short-term loans, where ignoring compounding is less of an issue.

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RELATED FAQS
  1. What are some examples of simple interest loans?

    Two good examples of simple interest loans are simple interest car loans and the interest owed on lines of credit such as ... Read Full Answer >>
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    Interest is the cost of borrowing money, where the borrower pays a fee to the owner for using the owner's money. The interest ... Read Full Answer >>
  3. Other than my savings account, what other types of holdings compound my interest?

    Investors and savers can use the power of compounding interest to accumulate wealth over time. Unlike simple interest that ... Read Full Answer >>
  4. How can I tell if a loan uses simple or compound interest?

    When analyzing the terms of a loan, it is important to consider more than the interest rate. Two loans can have identical ... Read Full Answer >>
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    All publicly-traded companies have a set number of shares that are outstanding on the stock market. A stock split is a decision ... Read Full Answer >>
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