Simple Interest Interest computed on the principal only. ILLUSTRATION: On January 2,2007,Tomalczyk borrows $20,000 for 3 years at a rate of 7%per year.Calculate the annual interest cost. Principal $20,000 FULL YEAR Interest rate Annual interest X 7% $1,400 Federal law requires the disclosure of interest rates on an annual basis in all contracts. Chapter 6-7 LO 2 Distinguish between simple and compound interest.Chapter 6-7 Interest computed on the principal only. ILLUSTRATION: On January 2, 2007, Tomalczyk borrows $20,000 for 3 years at a rate of 7% per year. Calculate the annual interest cost. Principal $20,000 Interest rate Annual interest x 7% $ 1,400 Federal law requires the disclosure of interest rates on an annual basis in all contracts