What Is Simple Interest?

By Matthew Frankel, CFP – Updated Nov 21, 2024 at 10:22 AM

Key Points

Simple interest is paid only on the principal of an investment or loan.
Compound interest is calculated on both the initial principal and accumulated interest.
Over time, compound interest generally yields more money than simple interest.

When you hear the term "interest," there are two things that it could mean for your wallet. There is simple interest, which, as the name implies, is the simpler form of interest to understand and calculate, and then there is compound interest.

Simple interest is definitely less common than compound interest in real-world applications. For example, when you hear a checking account or certificate of deposit's yield, it is actually a form of compound interest. However, there are some cases where simple interest is widely used, so it's important to understand how it is calculated.

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Chart on a monitor showing bond yield rates. — Image source: Getty Images.

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

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