Simple interest.

In plain English

Simple interest is calculated on the starting principal alone for the entire term, so the amount charged or earned in each period never changes and interest never earns interest. The total grows in a straight line rather than a curve. Some auto loans and short-term personal loans use a simple interest method, where a payment covers the interest accrued since the last payment and the rest reduces principal. The practical effect there is that paying early reduces the interest that accrues, because accrual depends on the days elapsed.

01Why it matters

Simple interest is the cheaper structure for a borrower and the weaker one for a saver, so the same rate means very different money depending on which side of it a person sits.

02The math, step by step

Borrow 2,000 dollars at 6 percent simple interest for 3 years: 2,000 x 0.06 x 3 = 360 dollars of interest, 2,360 dollars repaid. Compounded annually at the same rate the balance would be 2,000 x 1.06^3 = 2,382 dollars, 22 dollars more.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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