Understanding Simple Interest (SI)

Simple Interest is the most straightforward method of calculating interest. Unlike compound interest, where interest is calculated on the principal plus accumulated interest, simple interest is calculated only on the original amount of money deposited or borrowed.

The Formula

SI = (P × R × T) / 100

P = Principal Amount
R = Annual Interest Rate
T = Time (in years)

Key Usage

✓ Car Loans (Flat Rate)
✓ Consumer Durable Loans
✓ Short-term Certificates of Deposit
✓ Academic Math Problems

Simple Interest vs. Compound Interest

In the financial world, Simple Interest is often seen in short-term transactions or specific loan types. While it is easier to calculate, it doesn't grow your wealth as fast as compound interest because you never earn "interest on interest." However, for a borrower, simple interest can be cheaper over the long term if the rates are comparable.

Pro Tip

Always check if your bank uses a 360-day or 365-day year for daily interest. This small 5-day difference can change your maturity value on large sums!

Frequently Asked Questions

Generally, yes. Since simple interest is only calculated on the original principal, the total interest paid is typically lower than a compounding loan with the same interest rate and term.

Yes. By dividing the annual interest rate by 365 (or 360, depending on the bank's standard), you get a daily rate. This is then multiplied by the number of days the principal is held.

The 'interest on interest' factor. Simple interest only grows based on the principal, while Compound interest adds previous interest earnings back to the principal, leading to exponential growth.

It provides instant clarity on flat-rate financial products like short-term personal loans, car loans with fixed interest, and basic savings accounts that don't offer compounding.

Last Updated: January 2026Category: Finance / Basic Math