The one formula everyone half-remembers
Simple interest is interest on the principal and nothing else. Lend ₹1 lakh at 8% and it earns ₹8,000 every single year — year one, year five, year twenty — because the interest never joins the principal to earn interest of its own. Three numbers multiplied together; the school formula, unchanged.
Its virtue is transparency. There is no compounding frequency to ask about, no “effective annual yield” footnote — just P × R × T. That is exactly why it survives in the situations below, where both sides want arithmetic they can check on a phone in ten seconds.
Simple vs compound — small gap, then a chasm
For short periods the two methods barely differ, which lulls people into thinking the distinction is academic. It is not — the gap grows with time, and it grows fast. The same ₹1 lakh at 8% earns ₹40,000 simple interest over five years versus ₹46,933 compounded yearly; stretch to twenty years and it is ₹1.6 lakh simple against ₹3.66 lakh compounded. The result slip above shows this gap live for whatever numbers you enter.
The practical rule: over anything longer than a couple of years, always ask which method applies. “8% simple” and “8% compounded” are materially different products wearing the same label.
| 5 years | ₹1,40,000 vs ₹1,46,933 |
| 10 years | ₹1,80,000 vs ₹2,15,892 |
| 20 years | ₹2,60,000 vs ₹4,66,096 |
Where simple interest still runs India
Bank FDs shorter than six months typically pay simple interest, not compounded. Education loans charge simple interest during the study-plus-moratorium period — one of the few genuinely borrower-friendly clauses in Indian lending, and a strong reason to pay at least the interest during college if the household can manage it, so it never capitalises into the principal. Gold loans from many NBFCs, court-ordered compensation, delayed-payment penalties on invoices, and most informal lending between friends and family all run on simple interest too.
Then there is the moneylender convention: rates quoted per month. “2% monthly” sounds gentle and is 24% a year — set the rate slider to 24 and watch what it does to a five-year loan. Whenever a rate arrives without a unit attached, the unit is where the trick lives.
The flat-rate loan trap
Some car and personal loan offers quote a “flat rate” — simple interest charged on the full original principal for the whole tenure, even as your EMIs steadily repay it. Since on average only about half the principal is actually outstanding, a flat rate costs nearly double its stated number: 8% flat over five years works out to roughly 14.5% as a genuine reducing-balance rate — the way banks, and this site’s EMI calculators, actually compute interest.
The defence is one question: “What is the reducing-balance rate?” A lender who will not answer it has answered it.