By definition, simple interest is usually determined based on three factors: the initial principal; the interest rate applied to the interest calculation period; and the number of interest calculation periods.
For example: You borrow 10 million VND from the bank at an interest rate of 3% per month. The interest you have to pay in the first month is 10,000,000 * 3% = 300,000 VND. In the following month, the interest is still calculated at 300,000 VND.
Therefore, each month, interest is always calculated based on the initial principal amount of 10 million VND, provided you repay the loan on time, the amount of interest will not change.
The benefits of simple interest
Simple interest not only helps individuals and businesses manage their finances more easily but also stimulates borrowing and investment, contributing to national economic development. The transparency and stability of simple interest help create a trustworthy financial environment.
For the public: Simple interest makes it easier for people to calculate and control the amount of interest they have to pay, making borrowing simpler. This encourages people to borrow money for investment and consumption.
Simple interest is the interest calculated on the initial principal without adding any previously accumulated interest. (Source: Internet)
For businesses, a fixed interest payment allows them to control risk and plan for the long term. This is especially important for startups, enabling them to focus on business development without worrying about the complexity of accrued interest. Furthermore, simple interest makes it easier for businesses to access loans, providing them with additional funds to invest in new projects and expand their operations.
The stability of simple interest rates encourages people to save their spare money instead of spending lavishly or investing in risky assets. This, in turn, reduces consumer demand and inflationary pressure.
At the same time, the stability of simple interest rates encourages investors to invest in long-term assets, production projects, and infrastructure. This, in turn, increases the supply of goods and services. This increased supply can lower prices, significantly contributing to inflation prevention.
Simple interest calculation formula
Simple interest is calculated using the following formula:
Simple interest = A*n*r /100
In there:
A: The initial amount of money invested or borrowed.
n: The number of interest calculation periods, usually in years.
r (%): Applicable interest rate.
Here's a specific example:
You deposit 50 million VND into a bank savings account with a 2-year term and an applicable interest rate of 6% per year. Based on the simple interest calculation formula, we have:
Simple interest = 50,000,000 * 6 * 2 / 100 = 6,000,000 VND.
Therefore, after 2 years of saving with simple interest, you will receive a total of 56 million VND (principal plus interest, an increase of 12%).
Advantages and disadvantages of simple interest
Regarding the advantages:
The amount of interest paid on loans is not excessive when using simple interest. This is because interest is calculated only on the initial principal amount, not compounded from previous periods.
For those who take out short-term loans or borrow small amounts, simple interest allows them to save a significant amount of money.
The interest rate calculation method is simple and easy to understand, suitable for everyone, especially those who are new to borrowing or investing.
Debts will be paid off easily and on time thanks to the transparency and clarity of simple interest.
Regarding disadvantages:
Simple interest doesn't accurately reflect financial costs: Simple interest only calculates interest on the initial principal amount, without adding any accumulated interest. Therefore, it doesn't truly reflect the actual interest earned on a loan or investment compared to compound interest. This can lead to underestimating borrowing costs and making poor choices.
Lack of flexibility in the face of market fluctuations: When market interest rates fall, simple interest borrowers cannot take advantage of the lower rates. Conversely, with compound interest, interest rates can be adjusted to reflect current rates, helping borrowers save and optimize their financial costs.
Inefficient interest rate calculation for long-term or large loans: Several cases have shown that applying simple interest rates does not provide optimal benefits compared to utilizing other interest calculation methods, especially for large or long-term loans.
Practical applications of simple interest
In practice, simple interest is often applied to a few specific cases as follows:
Personal loans: In personal loans, simple interest is applied to calculate interest rates quickly and easily. This makes it easy for both parties to track and manage the amount of interest payable. Additionally, borrowing costs are minimized by taking advantage of simple interest.
Short-term lending: Simple interest is also used for short-term loans, such as cash loans for shopping or consumption. These loans need to be repaid quickly, so applying simple interest simplifies the interest calculation process and provides a more stable return compared to compound interest.
Source: https://vtcnews.vn/lai-don-la-gi-ar913036.html
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