The interest that is calculated only on the principal amount or on a portion of the principal that is still unpaid. It is the most basic type of interest as interest is not added to the principal in calculating next period’s interest. This means compounding is not accounted for. The following formula is used in figuring out simple interest:

Interest= principal x rate x time

For example, the simple interest for a two-year loan of USD100 bearing an interest rate of 5% is:

Interest= 100x 5% x 2= USD 10