Simple Interest Formula:
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The Simple Interest Finance Charge is the cost of borrowing money calculated only on the principal amount. It's commonly used for short-term loans and some types of consumer credit.
The calculator uses the simple interest formula:
Where:
Explanation: The formula calculates interest based only on the initial principal, without compounding.
Details: Understanding finance charges helps borrowers compare loan costs and make informed financial decisions. It's essential for budgeting and financial planning.
Tips: Enter principal in USD, rate as decimal (e.g., 0.05 for 5%), and time in years. All values must be positive numbers.
Q1: How is this different from compound interest?
A: Simple interest is calculated only on the principal, while compound interest includes interest on previously earned interest.
Q2: When is simple interest typically used?
A: Common for short-term loans, car loans, and some personal loans. Most savings accounts use compound interest.
Q3: How do I convert APR to decimal?
A: Divide the percentage by 100 (e.g., 5% becomes 0.05).
Q4: What if my time period isn't in full years?
A: Convert months to years by dividing by 12 (e.g., 6 months = 0.5 years).
Q5: Does this work for partial payments?
A: No, this calculator assumes the full principal is outstanding for the entire period.