About the simple interest calculation
Simple interest is charged only on the original principal, never on accumulated interest. It grows in a straight line rather than a curve, which makes it much cheaper than compound interest for a borrower and much worse for a saver. Most short-term consumer loans and some car finance still quote it.
Formula
Interest = P × R × T ÷ 100
P = principal
R = annual rate as a percentage
T = time in yearsWorked example
100,000 at 6% for 3 years: 100,000 × 6 × 3 ÷ 100 = 18,000 of interest, so 118,000 repaid in total. Exactly 6,000 accrues each year, every year.
Frequently asked questions
When is simple interest actually used?
Short-term personal and car loans, some bonds, and many informal lending arrangements. Because it never compounds, it is easier to state and easier to verify, which is why it survives in consumer credit.
Is a "flat rate" the same as simple interest?
Effectively yes, and it is why flat rates are misleading. A flat 6% loan charges interest on the full original amount for the whole term even though you have been repaying it, so the true effective rate is often close to double the quoted one.
Which is better for me?
If you are borrowing, simple interest is cheaper. If you are investing, compound is dramatically better and the gap widens every year. Over 20 years at 10%, compounding earns more than three times what simple interest does.
Sources
- Standard simple interest formula