What is “simple interest”, and how is it calculated?
Simple interest is interest computed only on the principal balance, without compounding. In a simple interest loan agreement, the interest charged is determined by the unpaid principal balance on the loan, the interest rate, and the number of days since the last payment. The rest of the payment goes to the principal. Making early payments or additional payments will reduce the loan’s principal and cut the total interest paid over the life of the loan.
