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Simple Interest
P x In = I
Where:
P = Principal
In = Interest rate
I = Interest
Simple interest is the most basic interest rate structure which takes the loan principal multiplied by the interest rate, to obtain the interest cost.
This means that $100 x 5% will equal to $5.
Simple interest is the interest rate that everyone intuitively understands and often assume it’s what lenders are charging borrowers at.
It’s a huge irony that very few (or none) of the loans available from the big banks are structured with simple interest rates.
Even when a loan officer presents a loan to a borrower with simple interest, it is more likely that it is not. And rather converted to simple interest so that a borrower would know how much interest is being charged.
So be mindful of that when presented with loans, especially mortgages, with simple interest.
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