Simple Interest

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Definition of 'Simple Interest'

**Simple Interest**

Simple interest is a type of interest that is calculated only on the principal amount of a loan or investment. It is calculated by multiplying the principal amount by the interest rate and the number of days the money is borrowed or invested.

The formula for simple interest is:

I = (P * r * t)/100


* I is the interest
* P is the principal amount
* r is the interest rate
* t is the number of days

For example, if you borrow $100 at an interest rate of 10% for 1 year, the interest will be $10 ($100 * 10% * 1).

Simple interest is a simple way to calculate interest, but it does not take into account the effects of compounding. Compounding occurs when interest is added to the principal amount and then interest is calculated on the new, larger principal amount. This means that the interest earned in each period is greater than the interest earned in the previous period.

Compound interest is a more powerful way to grow your money than simple interest. Over time, the difference between simple interest and compound interest can be significant.

Here is a table that shows the difference between simple interest and compound interest over time:

| Time | Simple Interest | Compound Interest |
| 1 year | $10 | $11 |
| 2 years | $20 | $23 |
| 3 years | $30 | $36 |
| 4 years | $40 | $49 |
| 5 years | $50 | $64 |

As you can see, the difference between simple interest and compound interest grows over time. This is because compound interest earns interest on the interest that has already been earned.

Simple interest is a good option for short-term loans or investments. However, if you are planning to invest for a long period of time, compound interest is a better option.

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