Figuring out how much simple interest can affect your loan or savings account can seem like a daunting task, but fear not. Calculating interest is as easy as multiplying a few numbers together. It's important to be aware of the different types of interest rates and how they work in order to make the best financial decisions for your unique situation.
What is simple interest?
Simple interest is a form of interest that is calculated on a periodic basis, such as monthly or yearly. This type of interest is typically lower than compound interest, which is interest that compounds on an existing principal over time. Interest rates are determined using a calculation that takes into account the borrower's current monthly payment and the period of time that is applied to the loan or the account.
The reason why simple interest is called simple is because it's a form of interest that doesn't compound. That means that the interest is either calculated on the principal amount of a loan or the original contribution to the savings account.
Calculating Simple Interest
The formula for simple interest is: P x n x r where P = Principal, n = Number of months, and r = Annual Rate.
Simple Interest Is Simple to Understand
Let’s look at one example. If you borrow money, the institution will charge you interest on the loan. Simple interest on the loan applies to the principal amount of the loan. And you will not have to pay interest on the interest you incur. Simple interest is calculated by adding a fixed percentage (usually between 0.5% and 1%) to the original loan amount.
If you'd like more information about how simple interest can impact your financial goals, contact the office.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisors LLC nor any of its representatives may give legal or tax advice.
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