Simple Interest
So far, I've explained interest using the logic of “simple interest.” Although simple interest usually isn't available in practice, it's much easier to understand than what is usually available. I describe simple interest because it's a convenient starting point for explaining compound interest, which is discussed below. Compound interest is the one most commonly found in practice.
Under simple interest, the entire interest payment is due at the end of the loan. The interest owed can be calculated by multiplying the amount borrowed (P) times the interest rate (i) times the number of interest periods the money is being borrowed for (n).
I = P*i * n
As an example, suppose that Company A needs to borrow $10k for 3 years. They find ...
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