Finance · Glossary
What is Simple Interest?
Quick definition
Interest calculated only on the original principal, not on accumulated interest. Used in short-term and consumer loans.
Full explanation
Simple interest is calculated as Principal × Rate × Time, with no compounding. Most car loans, personal loans, and short-term business loans use simple interest. A $10,000 car loan at 6% simple interest for 5 years costs $3,000 in interest, paid linearly. By contrast, the same principal at 6% compound interest would cost $3,485. Simple interest is more predictable and cheaper for borrowers over short periods, but compound interest is the norm in long-term savings and credit cards. The phrase "simple interest loan" usually means a loan where interest accrues on the original principal only.
Related calculators
Calculators that use or explain Simple Interest.
Related terms
More from Finance
APR (Annual Percentage Rate)
The yearly cost of a loan, expressed as a percentage, including most fees. Used when borrowing money.
APY (Annual Percentage Yield)
The yearly return on a deposit or investment, including the effect of compounding. Used when saving money.
Compound Interest
Interest calculated on the initial principal AND on the accumulated interest from previous periods. The engine of long-term wealth.
Principal
The original sum of money borrowed or invested, not including interest. The base on which interest is calculated.
Amortization
Spreading loan payments over time so each payment covers both principal and interest, with the loan fully paid off at the end.
Equity
The current market value of an asset minus any outstanding debt against it. What you actually OWN of the asset.
Last reviewed: June 15, 2026 • Category: Finance