# What is simple interest? A straightforward way to calculate the cost of borrowing or lending money

- Simple interest is the interest applied only to the original amount of money borrowed or deposited, also known as the principal.
- It’s calculated by multiplying the interest rate by the principal payment, then by the time (in years) you’re investing your money.
- Unlike compound interest, simple interest does not accrue over time, making investments grow at a slower rate.
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They say money doesn’t grow on trees, but one way to to make the most of what you earn is by paying attention to interest.

As far as financial concepts go, interest is one of the most important to understand. Essentially, it’s the payment you receive when you lend (or deposit) money, as well as the money you pay when you borrow it.

Interest also comes in two forms: simple and compound. Simple interest is calculated based on an investment or loan’s principal balance, which is the initial amount you put down or borrowed. And compound interest combines previously accumulated interest to the initial amount, sometimes referred to as “interest earned on interest.”

Understanding simple interest and how it can affect your savings account or a potential investment is the first step in deciding whether it will be advantageous for your situation.

## What is simple interest?

Interest is the fee attached to money, whether borrowed, loaned, or invested, and simple interest is the fixed rate that applies only to an investment or loan’s principal balance. This type of interest calculation is considered simple because of how it’s applied.

Simple interest is relevant to saving, borrowing, and investing, though it’s typically most fruitful when borrowing, because it means your debt won’t pile on over time.

Simple interest most commonly applies to short-term loans, like car loans, installment loans, personal loans, and some types of mortgages.

The first payment made on a simple interest loan covers that month’s interest charge, with the rest going toward reducing the principal amount. Each month’s interest is paid out in full, and any unpaid interest does not add up from one month to another like compound interest.

Simple interest can also affect how you invest and grow your money. It’s interest earned only on the initial amount invested, or the principal balance. Investors earn simple interest on a steady basis, and it doesn’t accumulate with time.

Savings accounts or certificates of deposits with this interest structure earn you a monthly interest income in exchange for making your money available for the bank to lend out.

## How to calculate simple interest

The formula for simple interest is as follows: