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What is simple interest?

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What is simple interest?

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Simple interest is interest paid only on the “principal” or the amount originally borrowed, and not on the interest owed on the loan. For example, the simple interest due at the end of three years on a loan of $100 at a 10% annual interest rate is $30 (10% of $100, or $10, for each of the three years). No interest is calculated in the second year on the $10 interest that was due after the first year, and no interest is calculated in the third year on the interest that was due after two years.

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Simple interest is the value of money over a specific period of time. Interest is a mathematical calculation of the cost to borrow money or the amount earned from lending money. Simple interest is most commonly used for loans and investments. The calculation for simple interest uses three items: principle, interest rate, and length of time. Principle is the total amount of money borrowed or invested. Interest rate is the percentage rate used to calculate the interest amount. The length of time is the same as the repayment period. The longer the loan is for, the more it will cost in interest. The formula to calculate simple interest is I = PRT. In this formula, “P” is the principle amount of the loan, “R” is the interest rate, which is expressed as a percentage value and “T” is the number of periods in time. If the time is provided in days, then simply create a fraction with the number of days as the numerator and 365 as the denominator. Interest calculations are used for three reasons:

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Video Transcript What is Simple Interest? There are two types of interest in the world, and I’m financial planner, Patrick Munro. And I’d like to talk to you about one type of interest called simple interest. Just like the name implies, it’s quite easy to understand. Basically, it is a simple percentage that the borrower has to pay back on a loan to the creditor. And that particular rate of interest is fixed, normally, and is fully understandable by both parties. And it is the most cost-effective way to go, in that sense of the word. Simple interest is the most effective type of interest rate, because it does not compound, which enters our next topic. Compound interest compounds upon each interest accrual. And therefore, if you’re paying compound interest, that can get to be very problematic for you. If you’re earning compound interest, though, it’s great to do that as an investor. The best rate, or most simple type of rate, to pay is simple interest. And this is Patrick Munro, financi

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