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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.
simple interestsee INTEREST.
simple interestthe INTEREST on a LOAN that is based only on the original amount of the loan. This means that, over time, interest charges grow in a linear fashion. For example, a £100 loan earning simple interest of 10% per annum would accumulate to £110 at the end of the first year and £120 at the end of the second year, etc. Compare COMPOUND INTEREST.
Interest on the principal balance of a loan or debt,but without compounding due to also charging interest on past-due and unpaid interest.
A transaction in which interest is not paid on interest— there is no compounding.
For example, if you deposit $1,000 in an account that pays 5% a year simple interest, you would receive $50 interest in year one and another $50 in year two. If interest were compounded annually, you would receive $52.50 in year two.
All deposit accounts compound interest, however, because if they didn't, depositors would shuffle accounts between banks. In my example, you could withdraw the $1050 at the end of year one, put it into another bank, and earn $52.50 in year two.