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Simple interest is a quick method of calculating the interest charge on a loan. It is determined by multiplying the daily interest rate by the principal by the number of days that elapse between payments.
A = P(1 + rt)
Where:
A = Total Accrued Amount (Principal + Interest)
P = Principal Amount
r = Rate of Interest per year (in decimal; r = R/100)
t = Time Period (in years)
Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal amount and also on the accumulated interest of previous periods.
It is commonly used for short-term loans, some types of mortgages, and auto loans. Savings accounts typically use compound interest.
