Simple Interest
Interest calculated only on the principal amount.
Simple interest is calculated only on the original principal, not on any accumulated interest. It is straightforward to compute and commonly used for short-term loans, auto loans, and some business credit facilities. Simple interest results in lower total interest paid compared to compound interest over the same period.
Formula
Simple Interest = Principal × Rate × TimeExample
A business borrows $20,000 at 8% simple interest for two years, paying $3,200 in total interest ($20,000 × 0.08 × 2) regardless of payment schedule.
Why It Matters for Your Business
Knowing whether a loan uses simple or compound interest helps you accurately calculate total borrowing costs and compare loan offers.
Related Terms
More Banking Terms
ACH
Automated Clearing House - an electronic network for financial transactions.
APR
Annual Percentage Rate - the yearly cost of borrowing including fees.
APY
Annual Percentage Yield - the real rate of return on savings including compound interest.
Bank Reconciliation
Matching bank statements with internal records to identify discrepancies.
Business Checking
A bank account designed for business transactions.
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