What is simple interest?
Simple interest is a form of interest that is used with various financial products, including loans and investments. The concept behind simple interest is a straightforward one: fixed payments are made periodically to the borrower or investor, at set intervals over a predetermined length of time.
How to calculate simple interest?
To calculate simple interest, you need to know the principal amount, the interest rate, and the length of time for which the interest will be charged. The formula for calculating simple interest is:
Simple Interest = (Principal Amount x Interest Rate x Time) / 100
For example, if you have a principal amount of INR 1,000 and you are charged an interest rate of 5% for a period of 2 years, the simple interest would be calculated as follows:
Simple Interest = (1,000 x 5 x 2) / 100
Simple Interest = 100
Therefore, the simple interest on this investment would be INR 100.
Difference between simple interest and compound interest
Simple interest is the rate applied to the initial principal of a loan or deposit, usually over a period of one year. It adds a fixed amount of interest to the loan or deposit each period without any additional accumulation and so remains constant throughout.
On the other hand, compound interest also accumulates over time but involves a cyclical process of adjusting, adding and recalculating. With compound interest, each period’s interest compounds with all of the past unpaid principal and earned interest on previously calculated interests meaning that its addition to a balance increases gradually as time goes by.