How Simple Interest Works: An Example Suppose you take out a $5,000 loan at 6% interest for two years. To calculate the amount of interest you will pay, use the simple interest formula above.

Simple interest is most commonly used for short-term loans – like payday loans, or some types of personal or auto loans. It’s the easiest to understand and calculate.

Simple interest refers to the interest earned only on the initial deposit in a savings account. So, if your initial deposit was $500, the simple interest would be calculated based on that amount.

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How does a simple interest loan work? With a simple interest loan, it’s easy to calculate how much interest you will pay. All you need to know is the principal amount — the original amount you ...

Here are some examples that illustrate when simple or compound interest is accrued and how the interest accrues differently: Certificate of deposit: A $1,000 five-year CD pays simple interest of 4%.

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The lender provides the yearly interest rate, so divide that rate by 12 for this equation. If your interest rate is 4.25%, divide 0.0425 by 12 to find your monthly rate: 0.00354166%.