Simple interest is a method for calculating the amount of interest charged on a sum over a set period of time at a set rate. Unlike compound interest, where we add the interest of the previous year’s principal to compute the interest of the current year, the principal amount in simple interest is always the same.
This course will introduce you to the notion of borrowing money and the basic interest that can be earned as a result of borrowing. You’ll also learn about terminology like principal, amount, interest rate, and time period. The simple interest formula may be calculated using these terms and the simple interest formula.
What is Simple Interest?
Simple interest is a quick and simple technique of calculating money interest. Under the simple interest technique, interest is always applied to the initial principle amount, and the rate of interest is the same for each time cycle. When we deposit money in a bank, the bank pays us interest on the amount we have invested. Simple interest is one of the several forms of interest that banks charge. Let’s first define what a loan is before delving more into the notion of simple interest.
A loan is a sum of money borrowed from a bank or other financial institution to meet one’s requirements. Home loans, vehicle loans, student loans, and personal loans are all instances of loans. A loan amount must be repaid to the authorities on time, along with an additional amount, which is generally the interest paid on the loan.
Simple Interest Formula
Simple interest is computed using the formula S.I. = PXRXT, where P is the principal, R is the annual rate of interest in percent, and T is the time, commonly expressed in years. The interest rate is expressed in percentages and is written as r/100.
- Principle: The principle is the amount borrowed or invested from the bank at the start. P stands for the principle.
- Rate: The rate of interest at which the principal amount is handed to someone for a specific period of time; the rate of interest can be 5%, 10%, or 13%, for example. R stands for the rate of interest.
- Time: The length of time for which the major amount is handed to someone is referred to as time. T stands for time.
- Amount: When a person takes out a loan from a bank, he or she must repay the principle borrowed plus the interest, which is referred to as the Amount.
Amount = Principal + Simple Interest
A = P + S.I.
A = P + PRT
A = P(1 + RT)
Simple Interest Example:
Drake’s father took out a $1,000 loan from the bank, with a 5% interest rate. What would the simple interest rate be if you borrowed the money for a year? Calculate the simple interest if the money is borrowed for two years, three years, and ten years, respectively.
The principal amount is $1,000, and the interest rate is 5% (5/100). (Insert a statement here to describe the information provided in the question.)
|1 Year||S.I = (1000 ×5 × 1)/100 = 50|
|2 Year||S.I = (1000 × 5 × 2)/100 = 100|
|3 Year||S.I = (1000 ×5 × 3)/100 = 150|
|10 Year||S.I = (1000 × 5 × 10)/100 = 500|
For the above question, we can also prepare a table that includes the amount to be returned after the given time period.
|1 Year||S.I = (1000 ×5 × 1)/100 = 50||A= 1000 + 50 = 1050|
|2 Year||S.I = (1000 ×5 × 2)/100 = 100||A= 1000 + 100 = 1100|
|3 Year||S.I = (1000 × 5 × 3)/100 = 150||A = 1000 + 150 = 1150|
|10 Year||S.I = (1000 × 5 × 10)/100 = 500||A = 1000 + 500 = 1500|
What Types of Loans use Simple Interest?
Compound interest is used by most banks these days on loans since it allows them to earn more money as interest from their clients. However, this strategy is more complicated and difficult to explain to customers. When banks adopt fundamental interest procedures, on the other hand, calculations become simple. When a consumer needs a loan for a short length of time, such as one month, two months, or six months, simple interest is quite handy.
When someone takes out a short-term loan with simple interest, the interest is calculated daily or weekly rather than annually. Consider a $10,000 loan with a basic interest rate of 10% per year. This 10% per year rate divides into a rate per day of 10/365 = 0.027 percent. So, on $10,000, you’ll have to pay an additional $2.73 every day.
Simple Interest vs Compound Interest
|Simple Interest||Compound Interest|
|The principal amount is always used as the basis for calculating simple interest.||The compound interest rate is calculated on the accumulated sum of principal and interest.|
|Calculated as follows: S.I.= P × R × T||Calculated as follows: C.I.= P × (1+r)t – P|
|On a certain principal, it is equal every year.||As it is calculated based on the amount, not the principal, it varies for every time period.|