Simple interest

Simple interest

Interest calculated as a simple percentage of the original principal amount. Compare to compound interest.

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simple interest

The interest that is paid on an initial investment only. Simple interest is calculated multiplying the investment principal times the annual rate of interest times the number of years involved. Compare compound interest.

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Simple interest. If you earn simple interest on money you deposit in a bank or use to purchase a certificate of deposit (CD), the interest is figured on the amount of your principal alone.

For example, if you had $1,000 in an account that paid 5% simple interest for five years, you'd earn $50 a year ($1,000 x .05 = $50) and have $1,250 at the end of five years.

In contrast, if you had been earning compound interest, you'd have $1,276.29 at the end of five years, since the interest you earned each year, as well as your principal, would have earned interest.