Simple Interest Definition

Simple interest is a fast mathematical method for estimating the interest change on a loan. Simple interest calculations ignore compounding interest and therefore the calculations are most accurate for short-term loans and always slightly underestimate the interest amount. To calculate, multiply the period interest rate by the principal by the number of periods:

  • SI = I x P x N (where SI is the simple interest, I is the period interest rate, P is the principal, and N is the number of periods).
  • For example, if $250 was borrowed for two years at an 8% annual interest rate the simple interest would be .08 x $250 x 2 = $40; the total loan amount would be $250 + $40 = $290. Note that in the example, assuming the interest compounded monthly, the actual total loan amount would be $291.28-a slight discrepancy.