How is simple interest defined?

Simple interest is defined as a percentage of the principal amount over time. This means that the interest earned or paid is calculated only on the original amount of money (the principal) and does not take into account any interest that may have been added to it over time. The formula for calculating simple interest is typically given as:

[ \text{Simple Interest} = \text{Principal} \times \text{Rate} \times \text{Time} ]

where the rate is expressed as a decimal (e.g., 5% would be 0.05) and time is measured in years.

This definition distinguishes simple interest from compound interest, which is calculated on the initial principal and also on the accumulated interest from previous periods, leading to potentially higher total interest over time. Understanding this distinction is critical for accurately managing loans and investments, as well as for personal finance decisions.