Simple Interest

What is simple interest?

The type of interest that is levied only on the principal amount and not on the aggregated interest amount is called simple interest. While calculating simple interest we do not add interest earned in the previous cycle to the amount in the next cycle.

What are simple interest formulas?

The formula to calculate the Simple Interest is: SI = (P×R×T)/100

What is compound interest formula?

The formula to calculate the Compound Interest is: CI = A – P

Are home loans simple or compound interest?

Usually, all the loans given by financial institutions are compound interest. So home loans are generally of compound interest type.

What is the difference between simple and compound interest?

Basic difference between Simple Interest and Compound Interest is that in simple interest the interest is paid only on the principal value, whereas, for compound interest, the interest is paid both on the principal value and the interest earned in previous intervals.

What types of loans use simple interest?

Generally, all banks, financial institutions, and other money-lending companies apply compound interest on the loans as in this way they will earn will more interest from the customers. The calculations of compound interest are difficult and require a lot of calculation which is difficult for the common people to do. 

So the loan disperses in the informal sector for a shorter period of time and is generally given on simple interest. For example, if a farmer wants to have a loan of 20,000 rupees for 3 months to prepare his crops he will go to a money lender who will give him the money at 3%-5% monthly interest. Here to make the calculations simpler these money lenders generally charge simple interest but at higher rates.

Simple Interest is the interest paid on the principal amount for which the interest earned regularly is not added to the principal amount as we do in compound interest.

Let’s learn more about Simple Interest in detail, including its formula and examples.