Simple interest is a method of calculating interest where the charge is applied only to the original principal amount. Unlike compound interest, simple interest does not account for accumulated interest from previous periods.
The formula is: Simple Interest = (Principal x Rate x Time) / 100. For example, if you deposit $10,000 at a 5% annual simple interest rate for 3 years, your interest earned would be ($10,000 x 5 x 3) / 100 = $1,500.
Simple interest is commonly used for short-term loans, car loans, and some bonds. It is straightforward to calculate and understand, making it a fundamental concept in finance. However, most long-term investments and savings accounts use compound interest, which generates higher returns over time.