What is Simple Interest? Definition, Formula, and Examples Story by [email protected] (Libby Kane, CFEI) • 7mo ...

The formula for simple interest requires your initial principal balance, annual interest rate, and time in years. Alyssa Powell/Insider Variables in a formula To use a simple interest calculator ...

Simple interest does not, however, take into account the power of compounding, or interest-on-interest, where after the first year the 1% would actually be earned on the $101 balance—adding up ...

For example, if you borrow $1,000 from a friend and agree to pay 6% simple interest for two years, the formula above tells you that you'll pay $120 in total interest ($1,000 x 0.06 x 2).

For example, if you take out a five-year loan for $20,000 and the interest rate on the loan is 5 percent, the simple interest formula would be $20,000 x .05 x 5 = $5,000 in interest.