What is Simple Interest?

The cost that you pay in addition to the principal amount for borrowing money after factoring in a certain rate of interest for a particular period is the simple interest. It does not take into consideration the power of compounding. Hence, the amount of interest you pay in each installment through the loan tenure stays constant as there is no interest charged on the interest.

What is the difference between a SIP and lumpsum?

A Systematic Investment Plan (SIP) is an organized way to spread your investment amount over time through regular fixed instalments. On the other hand, a lumpsum investment means depositing the entire chunk of money one time for some time.

When should one prefer lumpsum investment?

Lumpsum investments should be preferred when you have a large chunk of money at hand that needs to be invested. The source of this chunk could be years of accumulated saving, inheritance, a gift, sale proceeds from an asset/s, etc. A big-ticket investment combined with the right market timing can prove to be very profitable for a lumpsum investment.

Which MF is best for lumpsum?

Typically, Mutual Funds that have provided a high-yielding profit history are popular for Mutual Fund Lumpsum payments. You can take maximum advantage of the Mutual Fund scheme by investing your chunk at the right timing in the market.

What can I determine with the help of simple interest calculators?

You can calculate simple interest on a principal amount certain rate of interest for a particular period using simple interest calculators. It helps you to determine the simple interest that you pay on the principal amount as well as the total amount payable that is accrued over time.

Do interest rates on principal amount changes over time in SI?

No, interest rates on principal amount do not change over time in Simple Interest. This is because Simple interest does not take into consideration the power of compounding. Hence, the amount of interest you pay in each installment through the loan tenure stays constant as there is no interest charged on the interest.

What is Rate in Simple Interest?

The Rate in Simple Interest is the percentage at which you are annually charged over your principal amount for borrowing the principal amount for a specific period.

What is the difference between simple and compound interest?

Compound Interest takes into consideration the power of compounding through the tenure of the loan. This means it charges interest on interest and so the interest installments are not the same over time. While in the case of Simple Interest, there is no compounding factor, hence the interest amount stays the same throughout the tenure of the loan.

Where Is the Concept of Simple Interest Used?

Simple Interest can make you understand the time value of money. It helps you to understand how much you end up paying or receiving when you borrow money or advance a loan to someone respectively. You can also understand your returns using the concept of Simple Interest if you invest in an interest-based investment.

What are the limitations of simple interest?

In case you are investing money and are going to gain simple interest returns, you will receive the Simple interest only on the principal amount that you invest, whereas in compound interest, you gain interest on interest. This aspect of Simple Interest which does not factor in the compounding element is its limitation.