What are Simple Interest?
Simple interest is calculated only on the original value (principal). No matter how much time passes, the interest is always calculated on the same initial value. It’s the most basic type of interest.
Formula
J = P × i × t
Where:
- J = interest
- P = principal (initial value)
- i = interest rate (in decimal)
- t = time
Example
R$ 1,000 at 10% per year for 3 years (simple interest):
- Interest = 1,000 × 0.10 × 3 = R$ 300
- Total: R$ 1,300
Compare with compound interest:
- Year 1: 1,000 × 1.10 = R$ 1,100
- Year 2: 1,100 × 1.10 = R$ 1,210
- Year 3: 1,210 × 1.10 = R$ 1,331
- Total: R$ 1,331 (R$ 31 more)
Where do simple interest appear
In practice, simple interest is rare. They appear in:
- Some fine calculations
- Discount of duplicates
- Labor calculations
- Financial math exercises
Why does it matter? to know
Understanding the difference between simple and compound interest is fundamental. In the real world, almost everything uses compound interest — and that makes a huge difference in the long run, both for investments and debts.