Definition
Simple interest is calculated only on the original principal, never on accumulated interest. It produces a straight-line growth curve rather than the exponential curve of compound interest. Most short-term loans (like auto loans) use simple interest; most investments and savings accounts use compound interest.
Example
You deposit $10,000 at 7% simple interest. Each year you earn exactly $700 (7% of $10,000). After 20 years, your balance is $24,000 — $10,000 principal plus $14,000 interest. Compare this to compound interest at the same rate: $40,388. The $16,388 difference is entirely due to compounding.
How It’s Calculated
Simple Interest = P × r × t, where P = principal, r = annual interest rate (decimal), t = time in years. Total balance = P + (P × r × t). For the example: $10,000 + ($10,000 × 0.07 × 20) = $24,000.
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