What Is Simple Interest?
Simple interest is the most basic interest model in finance: it is calculated once, on the original principal, and never recalculated on top of interest that has already accrued. Contrast this with compound interest, where each period's interest gets added to the balance and starts earning interest itself. Because simple interest always uses the same starting principal, the dollar amount it adds is identical every single period — the balance grows in a straight line rather than curving upward.
That predictability is exactly why simple interest shows up where clarity matters more than yield: short-term promissory notes between individuals or businesses, certain auto loans and personal loans, add-on interest consumer credit, some certificates of deposit, and — very commonly — introductory finance and accounting courses, because it isolates the relationship between rate, time, and return before compounding is introduced.