At some point in our lives, most of us will borrow money from a lender. This might be in the form of a home mortgage, an auto loan, student loans, or even a home equity line of credit, but no matter the type of debt, we will almost always pay interest on that debt.
Simple Interest Definition
In the most basic terms, simple interest is the calculation showing how much will be paid in total interest on funds borrowed over a specific period of time.
Other Important Terms
Before we get into calculating simple interest, you’ll need to understand a few basic loan terms.
A loan’s APR is not the same as its interest rate, however. To figure that out – and calculate the total simple interest you’ll be charged – you’ll need to do a bit of math.
How To Calculate: Simple Interest Formula
As you can probably guess, calculating simple interest is pretty easy. In fact, you probably learned how to do it in high school, though many of us forgot this important financial lesson long before we ever signed on our first loan.
Other Ways To Calculate Interest
While the concept of simple interest is foundational for understanding other types of interest, it doesn’t tell the whole story. That’s especially true when you start talking about the oft-used – but much more complicated – compound interest method.
Summary: Start Simple To Learn About Interest
Understanding the concept of simple interest is imperative if you want to stay on top of your finances. Knowing how your debt, and your savings, will grow over time – and how much you’ll either pay or earn in interest – can guide many of your financial decisions.
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