What is Simple Interest?

Simple interest is calculated only on the original amount (principal). No matter how much time passes, the interest is always calculated on the same initial amount. It’s the most basic type of interest.

Formula

J = P × i × t

Where:

  • J = interest
  • P = principal (initial amount)
  • 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 Simple Interest Appears

In practice, simple interest is rare. It shows up in:

  • Some fine calculations
  • Discounting of bills
  • Labor calculations
  • Financial‑math exercises

Why It Matters

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 over the long term, both for investments and debts.