What is Simple Interest?
Simple Interest is a method of calculating interest where the interest amount is computed only on the original principal — it does not compound. It is straightforward, predictable, and widely used in short-term loans, vehicle loans, and some personal loans.
For example, ₹1 lakh at 8% simple interest for 3 years gives interest of ₹24,000, making the total repayment ₹1,24,000.
Simple Interest Formula
SI = (P × R × T) / 100
Total Amount = P + SI
Where:
P = Principal Amount
R = Annual Rate of Interest (%)
T = Time Period in Years
Simple Interest vs Compound Interest
- Simple interest grows linearly; compound interest grows exponentially.
- For borrowers, simple interest loans are cheaper over time than compound interest loans.
- For investors, compound interest is always more beneficial than simple interest.
- Short-term loans (under 1 year) often use simple interest — the difference from compounding is minimal.
Where is Simple Interest Used?
- Short-term personal loans and microfinance loans.
- Some vehicle financing schemes.
- Treasury bills and certain government bonds.
- Car loans in some flat-rate EMI structures.
