Definition: Simple interest is money earned or owed on only the original amount, calculated with the formula I = prt.
What is simple interest?
Interest is the fee for borrowing money or the reward for saving it. With simple interest, it is calculated only on the starting amount, called the principal.
What is the formula?
I = p x r x t, where p is the principal, r is the annual rate written as a decimal, and t is time in years.
How do you use it?
Suppose you deposit 1,250 dollars at 3.2 percent for 4 years. Then I = 1,250 x 0.032 x 4 = 160 dollars. The final balance is 1,250 + 160 = 1,410 dollars.
What if time is in months?
Convert to years. Nine months is 9/12 = 0.75 years. At 5 percent on 800 dollars, I = 800 x 0.05 x 0.75 = 30 dollars.
How does it compare with compound interest?
Compound interest also earns interest on past interest, so it grows faster. Simple interest grows by the same amount each year, a straight line.
What is a common mistake?
Using the percent as 3.2 instead of 0.032. Always convert the rate to a decimal before multiplying.