What Is Simple Interest? Its Effect on Loans and Investments

Interest is the fee lenders charge consumers for borrowing money. It also describes the amount consumers earn on their money when saving or investing. Interest is usually represented as a percentage. Simple interest is when lenders charge interest fees only on the principal amount, unlike compound interest, which charges interest on the principal plus any interest accrued.

Car loans, federal student loans, and personal loans use simple interest calculations, whereas credit cards use compound interest calculations.