What is simple interest?

Simple interest is one of the existing interest rates in economic terms. The word interest refers to the profit that a capital produces. This capital can be found in two situations in which interest is generated:

  • Borrowed capital. It can be capital that a financial institution has lent in a mortgage operation and for which it receives, together with the return of the principal, remunerative interest.
  • Capital deposited. It can also be a capital deposited in a financial institution that produces a profitability to its owner.

Interest is therefore used to measure the profitability of an investment or savings, or to calculate the cost of a loan.

Características del interés simple

Simple interest is characterized by the fact that the amount corresponding to the interest is not added to the principal, something that happens with compound interest. Besides this interest rate it remains constant during each term of the loan or investment. On the other hand, simple interest is calculated taking the capital as a reference. So they do not increase as time passes.

Formula for calculating simple interest

The formula to calculate the simple interest on a principal for complete periods of one year is the following:

Interés simple = C x I x T /100

For periods less than a year expressed in months, the following formula is used:

Interés simple = C x I x T / 1200

Where the values ​​of the formula are:

.- C: It is the amount of capital on which the simple interest calculation is made.

.- I: It is the interest rate. It is usually expressed as a percentage, so before including it in the formula we will divide it by 100.

.-T: It is the time that the borrowed or invested capital will be maintained. Expressed in whole years or in months depending on the formula.

Simple interest calculator

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