Simple interest is a method of calculating interest where the interest is applied only to the original principal amount (the initial amount of money) for the entire duration of the loan or investment. It does not take into account any interest that accumulates on previously earned interest, unlike compound interest.
In simple interest, the interest amount remains constant throughout the term of the loan or investment, as it is calculated based solely on the initial principal amount. This makes simple interest calculations straightforward and easy to understand.
The formula for calculating simple interest can be written as:
\begin{equation}
I = P\cdot r \cdot t ,
\end{equation}
where:
- \(I\) - is the total interest earned or paid.
- \(P\) - is the principal amount (the initial amount of money)
- \(r\) - is the annual interest rate (in decimal).
- \(t\) - is the time the money is invested or borrowed for, in years.