Simple interest is a quick method of calculating the interest charged 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 For example, if Mr. Farmer borrows $100,000 for one year—at a simple interest rate of 5%—he will pay 100,000 x 5% x 1, or $5000, to borrow the money for one year. Loans usually charge fees. Simple interest does not include these fees, so it will often not reflect the total cost of a loan. Simple interest also does not include the compounding effects of interest charged over time. For example, Mr. Farmer may get a second loan bid from another bank for 5.15%. However, this loan may have much lower fees than the loan at 5%. After accounting for fees, Mr. Farmer may find that it is cheaper to borrow money at 5.15% with low fees, than at 5% with high fees. This shows that simple interest by itself is not always the best way to compare loans. To get a more accurate estimate of the true cost of a loan, people often look at the Annual Percentage Rate, or APR, which takes into account the effects of fees and compounding. Thus, it better reflects the true cost of a loan than the simple interest rate does.