All of Reach Financial loans have simple interest. Here’s an explanation of the difference.
Simple interest is calculated only on the initial amount you borrow, also known as the principal. This means the interest is based on the original loan balance, and you pay a fixed amount of interest over time.
For example, if you borrow $1,000 at 5% simple interest, you’ll pay $50 in interest each year, no matter how long you have the loan.
Compounding interest with credit cards, on the other hand, means that interest is calculated not only on the original principal but also on the interest that has already been added to the balance. So, over time, you pay interest on both the original loan amount and the interest that’s been added.
For example, if you borrow $1,000 at 5% compound interest, the first year’s interest would be $50, but the second year’s interest would be calculated on $1,050 (the principal plus the first year’s interest). This process continues, causing the interest to grow over time.
In short, simple interest means you're paying interest only on the original loan amount, while compounding interest means you’re paying interest on both the loan amount and any interest that’s already been added.