Simple Interest

With simple interest, the interest charge for each period is based solely on the original loan amount (or remaining principal), rather than growing on top of interest that’s already accrued, which generally makes it more predictable and less costly than a compounding structure over time.

Many business term loans use simple interest calculated on the declining principal balance, which is part of why paying down principal faster, when a prepayment penalty doesn’t apply, can meaningfully reduce total interest paid.