Simple interest is calculated only on the original principal — not on any interest that accrues over time. It’s most commonly used for short-term loans or straightforward financial products like car loans or personal loans with fixed durations. Unlike compound interest, which can grow exponentially, simple interest grows at a linear rate. For example, if you invest $1,000 at a 5% simple interest rate, you’ll earn $50 each year — and only $50 — regardless of how many years pass. This makes it predictable but far less powerful than compound interest for long-term wealth accumulation. Misunderstanding the difference could lead to poor investment decisions or underestimating the impact of loan interest. When comparing financial products, always check whether interest compounds, how frequently it does so (e.g., daily, monthly, annually), and what the total cost or return will be over time.