The simple interest formula
Interest = P × R × T ÷ 100, where P is principal, R the yearly rate and T the time in years. ₹1 lakh at 10% for 3 years earns ₹30,000, making the total ₹1.3 lakh. Interest is charged only on the original amount, never on accumulated interest.
Where simple interest is used
Gold loans, many informal and short-term loans, some post office schemes and interest on delayed payments use simple interest. Bank FDs and most long-term loans compound instead, which is why the same rate costs or earns more over long periods.
Frequently asked questions
Is simple interest cheaper than compound interest?
For a borrower, yes over any period longer than one compounding cycle; for an investor it earns less.
How is time counted for months?
Convert months to years: 18 months is 1.5 years.
Do gold loans use simple interest?
Most NBFC and bank gold loans quote simple interest on a monthly reducing or bullet basis; check the loan terms.