What is simple interest?

As a rule, simple interest is usually determined based on three factors: the initial principal; the interest rate applied to the interest calculation period and the number of interest calculation periods.

For example: You borrow 10 million VND from the bank with an interest rate of 3%/month, the first month's interest you have to pay is 10,000,000 * 3% = 300,000 VND. The following month, the interest is still calculated as 300,000 VND.

Thus, each month, interest is always calculated based on the original principal amount of 10 million VND, provided you pay the loan on time, the interest amount will not change.

Benefits of simple interest

Simple interest not only helps individuals and businesses manage their finances easily, but also stimulates borrowing and investment, contributing to the development of the national economy . The transparency and stability of simple interest help create a trustworthy financial environment.

For people: Simple interest helps people easily calculate and control the amount of interest they have to pay, making borrowing simpler. This encourages people to borrow capital for investment and consumption.

Simple interest is interest calculated on the original principal without adding previously accumulated interest. (Source: Internet).

For businesses, fixed interest payments help businesses control risks and plan long-term finances. This is especially important for startups so they can focus on growing their business without worrying about the complexity of compound interest. In addition, simple interest also helps businesses easily access loans, have more money to invest in new projects and expand their business.

The stability of simple interest encourages people to save when they have spare money instead of spending it lavishly or investing it in risky assets. This reduces consumer demand and inflationary pressure.

At the same time, the stability of simple interest helps investors tend to invest in long-term assets, production projects and infrastructure. Thereby increasing the supply of goods and services. The increase in supply can reduce the price of goods, contributing significantly to preventing inflation.

Formula for calculating simple interest

Simple interest is calculated based on the following formula:

Simple interest = A*n*r /100

In there:

A: The initial amount of money deposited for investment or loan.

n: Number of interest calculation periods, usually calculated in years.

r (%): Applicable interest rate.

Specific examples:

You deposit 50 million VND in the bank for a 2-year term, with an interest rate of 6%/year. Based on the simple interest formula, we have:

Simple interest = 50,000,000 *6*2/100 = 6,000,000 VND.

Thus, after 2 years of saving with simple interest, you will receive the principal and interest of 56 million VND (12% increase).

Advantages and disadvantages of simple interest

About the advantages:

The amount of interest to be paid when borrowing is not too much when applying simple interest. Because the interest is only calculated based on the initial capital, not accumulated from previous periods.

For short-term borrowers or small loan amounts, simple interest can help them save a significant amount of money.

The way to calculate interest is simple and easy to understand, suitable for everyone, especially those who are new to borrowing or investing.

Debts will be paid easily and on time thanks to the transparency and clarity of simple interest.

About the disadvantages:

Does not reflect the true cost of finance: Simple interest only calculates interest on the original principal without taking into account the accumulated interest. Therefore, it does not truly reflect the actual amount of interest on a loan or investment compared to compound interest. This can lead to underestimating the cost of borrowing and making incorrect choices.

Lack of flexibility in the face of market fluctuations: When market interest rates fall, simple interest borrowers cannot take advantage of lower interest rates. In contrast, with compound interest, interest rates can be adjusted to reflect current interest rates, helping borrowers save and optimize financial costs.

Not optimizing interest for long-term or large loans: Some cases show that applying simple interest does not bring optimal benefits compared to taking advantage of other interest calculation methods, especially for large or long-term loans.

Applications of simple interest in practice

In practice, simple interest is often applied to a few specific cases as follows:

Personal Loans: In personal loans, simple interest is used to calculate interest quickly and easily. This makes it easy for both parties to track and manage the amount of interest to be paid. In addition, borrowing costs are also minimized by taking advantage of simple interest.

Short-term loans: Simple interest is also used for short-term loans, such as cash loans for purchases or consumption. These loans need to be repaid quickly, so applying simple interest simplifies the interest calculation process and provides a more stable return than compound interest.

PHUONG SOUTH (Synthesis)

Source: https://vtcnews.vn/lai-don-la-gi-ar913036.html