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Run basic calculations used in informal loans, vendor credit, and short-term capital financing. A straight-line approach without any overlapping compound traps.
Simple Interest generates the exact same absolute amount of interest every single year. The interest paid in Year 10 is identical to the interest paid in Year 1. There is no snowball effect.
Total Interest Paid
₹80,000
Over 10 years on 8% Rate
Total Repayment
₹1,80,000
Principal + Interest
Principal Amount
₹1,00,000
Original loan block
Cost of Borrowing
80%
Absolute cost %
Notice the chart line is perfectly straight. Contrast this against the exponential curve of Compound Interest.
| Year | Total Balance | Yearly Flat Interest |
|---|---|---|
| Year 1 | ₹1,08,000 | +₹8,000 |
| Year 2 | ₹1,16,000 | +₹8,000 |
| Year 3 | ₹1,24,000 | +₹8,000 |
| Year 4 | ₹1,32,000 | +₹8,000 |
| Year 5 | ₹1,40,000 | +₹8,000 |
| Year 6 | ₹1,48,000 | +₹8,000 |
| Year 7 | ₹1,56,000 | +₹8,000 |
| Year 8 | ₹1,64,000 | +₹8,000 |
| Year 9 | ₹1,72,000 | +₹8,000 |
| Year 10 | ₹1,80,000 | +₹8,000 |
Simple Interest is calculated exclusively on the original principal. The interest does not earn its own interest.
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Book Free ConsultationThe foundation of finance. While less lethal than compounding, understanding Simple Interest is crucial to detecting predatory 'flat rate' loans and structuring informal credit.
The Senior Citizen Savings Scheme (SCSS) and major RBI Floating Rate Bonds operate practically on Simple Interest, dispensing out fixed non-compounding cash flows every quarter.
Beware of personal loans quoting a 'Flat Interest Rate'. An 8% flat rate usually translates to an incredibly destructive ~15% Effective Annualized Compounding Rate under the hood.
Understand the dramatic difference between flat and compound: