Definition
Interest calculated only on the original principal, never on accumulated interest. A loan or investment at simple interest grows in a straight line, unlike compound interest, which grows on itself.
Why it matters
Knowing which kind of interest you are paying or earning changes the math: simple-interest loans reward extra principal payments immediately, and quoted rates mean different totals depending on compounding.
Example
A $10,000 loan at 5% simple interest costs $500 a year, so three years costs exactly $1,500. The same $10,000 compounding annually at 5% costs about $1,576 over three years, and the gap widens every year after that.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.