What is simple interest?
Simple interest is the amount of interest that is calculated on the amount of money that you borrow or refers to the interest that you receive on investments that pay interest on the principal amount. While simple interest calculates interest on the principal amount only, compound interest calculates interest factoring in the interest on the investment that has already been accrued or earned.
Simple interest formula
Here is the simple interest formula that is used in the calculation above. Simple interest = principal amount X interest rate X periods. Since the interest remains the same over periods for simple interest, this will provide you with the total interest over the term. The simple interest for one period would be principal amount X interest rate
Simple interest in Canada
While many financial products in Canada use compound interest, such as mortgages, car loans and credit cards there are still products that use simple interest. Financial products with shorter terms such as some short term Guaranteed Investment Certificates (GIC’s) calculate simple interest on the principal amount of the investment.