computations based only on the original principal. compound interest is applied to the original principal and accumulated interest. For example, $100 deposited in a savings account at 10% simple interest would yield the interest of $10 per year (10% of $100).
interest computed only on the principal balance, without compounding. Simple interest for a year on $100, borrowed at 8% interest, is $8. If interest is compounded daily, the finance charge is $8.33. Simple interest computation is the basis of variable rate consumer lending, and also is used widely in mortgage lending. When interest payments on loans are calculated on a simple interest basis, the borrower pays finance charges on the principal balance actually used. Interest calculated under the add-on interest method speeds up the rate of interest payment in the early years of a loan.
method of calculating the future value of a sum assuming that interest paid is not compounded, that is, interest is paid only on the principal.
interest calculation based only on the original principal amount. Simple interest contrasts with compound interest, which is applied to principal plus accumulated interest. For example, $100 on deposit at 12% simple interest would yield $12 per year (12% of $100). The same $100 at 12% interest compounded annually would yield $12 interest only in the first year. The second year's interest would be 12% of the first year's accumulated interest and principal of $112, or $13.44. The third year's payment would be 12% of $125.44-the second year's principal plus interest-or $15.05. For computing interest on loans, simple interest is distinguished from various methods of calculating interest on a precomputed basis.
sum of money paid on the principal amount of money invested or loaned.
method of calculating the future value of a sum assuming that interest paid is not compounded, i.e., that interest is paid only on the principal.
Example: An account is established paying simple interest of 10% on a principal of $1,000. Table 50 shows the current value of the account for the next 5 years.
| TABLE 50 | |
| SIMPLE INTEREST | |
| Year | Value |
| 1 | $1,100 |
| 2 | 1,200 |
| 3 | 1,300 |
| 4 | 1,400 |
| 5 | 1,500 |
