Legal Definitions - simple interest

Definition: Simple interest is a type of interest that is calculated on the principal amount of a loan or investment. It is a fixed percentage of the principal amount that is paid as interest over a certain period of time.

Example: If you borrow $1000 at a simple interest rate of 5% per year for 2 years, you will have to pay back $1100 at the end of the 2-year period. This is because the interest is calculated as 5% of the principal amount ($1000) for each year, which comes to $100 for 2 years. So, the total amount you have to pay back is $1000 (principal) + $100 (interest) = $1100.

This example illustrates how simple interest works. The interest is calculated only on the principal amount and does not take into account any interest that has already been paid. This makes it different from compound interest, where the interest is calculated on both the principal amount and any interest that has already been earned.