Simple Interest

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Simple interest is used to define how interest accrues on a loan or investment over time. Using the example of a loan, if a loan accrues interest based on simple interest, interest will only be calculated using the principal balance on that loan. This is different from Compound Interest. Many lenders calculate accrued interest daily, which is used to understand the total balance on the loan. 

To reduce the amount of interest that accrues on the loan, the borrower must lower the principal balance on the loan. Some lenders will offer zero payments for six months or even a year, which can help a borrower short-term if there is a financial need. 

Borrowers must understand that interest will still be accruing on the amount borrowed during this time, increasing the overall amount that must be paid before the loan is paid in full. Until the borrower starts paying on the loan, the total balance on the loan will continue to grow larger than the amount that was originally borrowed.

For more financial terminology resources and types of loans, return to the glossary home page.

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