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What is Simple Interest?
In Simple Interest (SI) loans, interest is calculated only on the original principal amount throughout the loan tenure — not on the accumulated interest. The formula is:
SI = Principal × Rate × Time (years)
Monthly instalment = (Principal + Total SI) / Total Months
- SI loans are common for gold loans, short-term working capital, and informal lending
- SI instalment is equal each month (like flat rate)
- SI is always cheaper than compound interest for the same quoted rate
Frequently Asked Questions
Is Simple Interest better for borrowers?
Simple Interest is cheaper than compound interest for the same rate and period, because interest does not accrue on unpaid interest. However, if the SI rate is significantly higher than a compound-interest loan's rate (e.g., flat vs reducing), the SI loan may still be more expensive.
Do banks in India use Simple Interest?
Most scheduled banks use reducing balance (compound interest monthly). Some gold loan lenders and informal lenders use simple interest. Confirm with your lender which method they apply.