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About This Calculation: Simple Interest Explained

What is Simple Interest?

Simple interest is the basic method of calculating interest only on the original principal amount (the initial sum borrowed or invested). Unlike compound interest, simple interest does not accrue interest on previously earned interest. The interest payment remains the same over the entire duration of the loan or investment.

• As a Borrower: Simple interest is typically better for you, as you pay less total interest over the life of the loan.

• As an Investor: Simple interest is generally worse for you, as you miss out on the accelerating growth potential of compounding.

The Simple Interest Formula

The calculation uses the most fundamental interest formula, which you can see in the calculation steps below.

Simple Interest (I) = Principal (P) × Rate (r) × Time (t)

• I: Total Simple Interest earned or paid.

• P: The Principal Amount (Initial Investment in this calculator).

• r: The Annual Interest Rate (expressed as a decimal).

• t: The Investment Period (in years).

The Future Value is the principal plus the total simple interest: FV = P+ I

Simple Interest vs. Compound Interest (The Key Difference)

Our calculator includes a side-by-side comparison with compound interest to clearly illustrate the difference.

• Simple Interest: The interest calculated each year is only based on the starting principal. The growth is linear.

• Compound Interest: The interest is calculated on the principal plus all previously accumulated interest. The growth is exponential over time.

As the charts and the "Compound Advantage" result show, over long periods, the difference in returns between the two methods can become substantial, making the compounding effect a critical consideration for investors.

Key Edits and Rationale:

1. Consolidation: Merged the three separate formula explanations (I=P_rt and I=P_rn) into a single, clearer formula block. Since the calculator uses years as the time period, I=P_rt is the most relevant format.

2. Focus: Removed the complex breakdown of different calculation frequencies (daily/monthly I=P_rn) as the calculator input is set for years/annual rates, which simplifies the explanation for the user.

3. Clarity: Kept the summary of Simple vs. Compound Interest and the explicit mention of who benefits (borrower vs. investor) as this is the most critical educational takeaway for a financial calculator.

4. Integration: Explicitly linked the explanation to the calculator's visual elements, like the "Compound Advantage" and the charts, to explain why the comparison is present.