DayCents

Simple Interest

Simple interest is calculated only on the original principal, never on interest already earned or owed. $1,000 at 5% simple interest earns exactly $50 a year, every year. It's the opposite of compound interest, where earnings themselves start earning.

Most auto loans and some personal loans use simple interest, which works in your favor — paying early reduces the principal that interest is charged on. Savings and investments, by contrast, benefit from compounding, which is why the distinction matters.