What is Simple Interest?
Simple interest is a method of calculating the interest you’ll pay on the money you borrow. With a simple interest loan, interest is paid only on the original amount borrowed. For most consumer loans which typically use a compound interest formula, the borrower pays interest on the combination of the principal sum borrowed and all unpaid interest.
Simple Interest Loans: The Basics
- Simple interest loans multiply the interest rate against only the loan’s principal to determine interest expense.
- Compound interest loans combine the loan’s principal to the unpaid interest, computing the interest on the combined sum.
- Simple interest loans don’t require borrowers to pay interest on the interest they owe.
Simple Interest Loans: Pros and Cons
- Pros:
- Borrowers don’t pay additional interest on the interest they owe
- If you make payments before the due date, you’ll save on the interest paid over the life of the loan
- Cons:
- Typically, there’s no grace period in a simple-interest loan
