Simple Interest - Definition, Formula, Examples, FAQs (2023)

Simple compounding is a method of calculating the amount of interest charged on a sum at a given rate and for a given period of time. With simple interest, the principal is always the same, unlike compound interest, where we add up the interest on previous years' principal to calculate next year's interest.

In this lesson, you will be introduced to the concept of borrowing money and the simple interest that is derived from borrowing. You will also be introduced to terms such as principal, amount, interest rate and term. Through these terms, you can calculate simple interest using the simple interest formula.

1.What is simple interest?
2.Simple interest formula
3.What types of loans use simple interest?
4.Simple interest vs. compound interest
5.Simple Interest FAQs

What is simple interest?

Simple compounding is a quick and easy way to calculate interest on money. With the simple interest method, the interest always applies to the original capital amount, with the sameRateinteresting for every time cycle. When we put our money in a bank, the bank pays us interest on our money. The interest rates charged by banks vary. One of them is simple interest. Before we delve deeper into the concept of simple interest, let's first understand what a loan means.

A loan is an amount that a person borrows from a bank or tax office to meet their needs. Examples of loans are home loans, car loans, educational loans, and personal loans. A loan amount must be repaid by the person to the authorities on time with an additional amount that usually equals the interest you pay on the loan.

Simple interest formula

Simple interest is calculated using the following formula:SI = P × R × T,where P = principal, R = interest rate in % per annum and T =Time, usually calculated as a number of years. The interest rate ispercentager% and is to be written as r/100.

  • Headmaster:The principal amount is the amount originally borrowed or invested by the bank. The client is denoted by P.
  • Rate:Interest rate is the interest rate at which the principal is given to someone for a certain period of time, the interest rate can be 5%, 10% or 13% etc. The interest rate is denoted by R.
  • Time:Time is the duration for which the principal amount is given to someone. The time is denoted by T.
  • Crowd:When a person takes out a loan from a bank, they must repay the principal amount borrowed plus the interest amount, and this total repayment is called the amount.

Amount = capital + simple interest

A = P + S.I.

(Video) Simple Interest Formula

A = P + PRT

A = P(1 + RT)

Simple Interest - Definition, Formula, Examples, FAQs (1)

Simple interest rate example:

Michael's father had borrowed $1,000 from the bank and the interest rate was 5%. What would the simple interest be if the amount is borrowed for 1 year? Similarly, do you calculate the simple interest when the amount is borrowed for 2 years, 3 years and 10 years?


Principal Amount = $1,000, interest rate = 5% = 5/100. (Add a sentence here that describes the information given in the question.)

simple interest

1 yearSI = (1000 × 5 × 1)/100 = 50
2 yearsSI = (1000 × 5 × 2)/100 = 100
3 yearsSI = (1000 × 5 × 3)/100 = 150
ten yearsSI = (1000 × 5 × 10)/100 = 500

Now we can also create a table for the above question, adding the amount to be returned after the specified period.

1 yearSI = (1000 × 5 × 1)/100 = 50A = 1000 + 50 = 1050
2 yearsSI = (1000 × 5 × 2)/100 = 100A = 1000 + 100 = 1100
3 yearsSI = (1000 × 5 × 3)/100 = 150A = 1000 + 150 = 1150
ten yearsSI = (1000 × 5 × 10)/100 = 500A = 1000 + 500 = 1500

What types of loans use simple interest?

Most banks apply these daysZineszinon loans because that way the banks get moreMoneyas interest from their customers, but this method is more complex and difficult to explain to customers. On the other hand, calculations become easier when banks use simple interest rate methods. Simple interest is very useful when a customer wants a loan for a short period of time, e.g. B. 1 month, 2 months or 6 months.

(Video) Simple Interest Formula Explained

If someone chooses a short-term loan with simple interest, the interest will be calculated on a daily or weekly basis instead of on an annual basis. Consider that you borrowed $10,000 on simple interest at a rate of 10% per year, so divide that 10% per year into an interest per day equal to 10/365 = 0.027%. So you have to pay $2.73 extra per day on $10,000.

Simple interest vs. compound interest

Simple interest and compound interest are two ways to calculate interest on a loan amount. It is believed that compound interest is more difficult to calculate than simple interest due to some fundamental differences between the two. Let's understand the difference between simple interest and compound interest using the table below:

simple interestZineszin
Simple interest is calculated on the original principal each time.Compound interest is calculated on the cumulative sum of principal and interest.
It is calculated using the following formula: S.I.= P × R × TIt is calculated using the following formula: C.I.= P × (1+r)T-P
It is the same for every year on a certain principle.It is different for each span of the period as it is calculated on the amount and not on the principal.

Simple Interest: Tips and Tricks

  • To determine the period, the day when money is borrowed is not taken into account, but the day when money must be returned.
  • The interest rate is the interest rate per $100 for a specified period of time.
  • Interest rates are always higher for compound interest than for simple interest.
  • The formula or method for calculating compound interest is derived from simple interest calculation methods.
  • The interest rate is always given in fractions in the formula.

think tank:

  • What if a bank gives you interest so your money doubles every day if you invest $1 the first day, in how many days will you become a billionaire?
  • Will you invest if a bank offers a negative interest rate?

Simple topics of interest

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compound interest formula

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Daily compound interest formula


(Video) Simple Interest Tutorial

Monthly compound interest formula

Simple Interest FAQs

What is the use of simple interest?

Simple interest is used in cases where the amount to be repaid takes a short time. For example, monthly amortization, mortgages, savings calculations, and student loans all use simple interest.

What types of simple interest are there?

There are two types of simple interest: ordinary simple interest and exact simple interest. Ordinary simple compounding considers a 360-day year when calculating interest, while exact simple compounding considers a 365-day (or 366-day leap year) year. Both methods use the same formula to calculate simple interest.

Are home loans simple or compound interest?

Home loan repayments take a long time, so the interest added by the lender is usually compound interest.

Are car loans easy or compound interest?

Car loans or auto loans use simple interest to calculate interest. The borrower agrees to pay back the money plus a flat percentage of the amount borrowed. However, if the borrower fails to repay the amount on time, the company or lender may start charging compound interest.

What is the difference between simple interest and compound interest?

Simple interest is the interest paid on the principal only, while compound interest is the interest paid on both the principal and interest that is compounded at regular intervals.

(Video) Compound Interest Formula Explained, Investment, Monthly & Continuously, Word Problems, Algebra

How do you calculate simple interest?

Simple rate is calculated using the following formula: SI = P × R × T, where P = principal, R = interest rate, and T = period. Here the rate is expressed as a percentage (r%) and is written as r/100. And principal is the amount of money that remains constant each year given simple compounding.

How do I calculate simple monthly interest?

To calculate simple interest monthly, we need to divide the calculated annual interest by 12. So the formula for calculating monthly simple interest is (P × R × T) / (100 × 12).


What is simple interest examples with answers? ›

Simple Interest

For example, if you borrowed $100 from a friend and agree to repay it with 5% interest, then the amount of interest you would pay would just be 5% of 100: $100(0.05) = $5. The total amount you would repay would be $105, the original principal plus the interest.

What is simple interest explain with example? ›

Simple Interest (S.I.) is the method of calculating the interest amount for a particular principal amount of money at some rate of interest. For example, when a person takes a loan of Rs. 5000, at a rate of 10 p.a. for two years, the person's interest for two years will be S.I. on the borrowed money.

Are there 2 formulas for simple interest? ›

Summary. This topic uses two formulas: Interest=Principal×Rate×TimeI=PRTAmount=Principal+InterestA=P+I Principal is your starting amount of money.

What is the best definition of simple interest? ›

Simple interest is the interest charge on borrowing that's calculated using an original principal amount only and an interest rate that never changes. It does not involve compounding, where borrowers end up paying interest on principal and interest that grows over multiple payment periods.

How do you solve for simple interest? ›

How do you Calculate Simple Interest? Simple Interest is calculated using the following formula: SI = P × R × T, where P = Principal, R = Rate of Interest, and T = Time period.

What are three simple interest examples? ›

Car loans, amortized monthly, and retailer installment loans, also calculated monthly, are examples of simple interest; as the loan balance dips with each monthly payment, so does the interest.

Which is an example of interest? ›

For example, a bank will pay you interest when you deposit your money in a high-yield savings account. The bank pays you to hold and use your money to invest in other transactions. Conversely, if you borrow money to pay for a large expense, the lender will charge you interest on top of the amount you borrowed.

How do you find the rate? ›

However, it's easier to use a handy formula: rate equals distance divided by time: r = d/t.

How do you find the simple formula? ›

To find the simplest whole number ratio, divide each number by the smallest number of moles: C: 3.41 / 3.41 = 1.00. H: 4.53 / 3.41 = 1.33.

What are 3 different methods of calculating interest? ›

There are three different interest calculation methods you can choose from for your loan product:
  • Fixed Flat.
  • Declining Balance.
  • Declining Balance (Equal Installments)
Oct 7, 2022

How important is simple interest? ›

simple interest loans are highly beneficial for borrowers as they have to make lower interest payments compared to compound interest loan offers. in a simple loan, the interest is calculated based on your outstanding loan balance on your payment due date.

What are the two types of simple interest? ›

Kinds of Simple Interest. There are basically two kinds of simple interest: ordinary and exact. These two terms uses the same formula for solving the simple interest but they differ on using the time.

What are the types of simple interest? ›

What are the types of simple interest? While the formula for calculating the simple interest remains the same, there are two types of it: ordinary and exact. The only difference is the usage of time in both categories.

What are the 4 types of interest? ›

Interest comes in various forms, and its primary types include Fixed Interest, Variable Interest, Annual Percentage Rate, Prime Interest Rate, Discounted Interest Rate, Simple Interest, and Compound Interest.

How interest is calculated with examples? ›

The formula for Simple Interest (SI) is “principal x rate of interest x time period divided by 100” or (P x R x T/100). Example, Now, if you invest INR 10,000 at 8% p.a. for 5 years, you can calculate the interest like this.

Are there two types of interest? ›

There are different types of interest rates, and each one usually aligns with specific loan types. For example, simple interest is often used for mortgages and loans, while compound interest is often used for revolving credit such as credit cards and overdrafts.

What is interest definition in math? ›

Interest is the amount to be paid on the borrowed money or the amount received on the money lent. The borrowed money or the lent money is called Principal. The sum of the interest and the principal is called the Amount. The rate at which the interest is charged on the principal is called Rate of Interest.

What is a unit ratio in math? ›

A unit ratio is a two-term ratio expressed with a second term of one. Every ratio can be converted to a unit ratio. Example.

How is flow rate calculated? ›

In order to determine the Flow Rate represented as Q, we must define both the volume V and the point in time it is flowing past represented by t, or Q = V/t. Additionally Flow rate and velocity are related by the equation Q = Av where A is the cross-sectional area of flow and v is its average velocity.

What are the most important formulas? ›

Important Math Formulas
  • Slope Formula: Slope = y₂ – y₁ / x₂ – x₁ ...
  • Slope Intercept Formula: y=mx+b. ...
  • Area of Triangle: Area = (1/2) (base) (height) ...
  • Sine (SOH): Sine = opposite / hypotenuse. ...
  • Cosine (CAH): Cosine = adjacent / hypotenuse. ...
  • Tangent (TOA): Tangent = opposite / adjacent. ...
  • The Pythagorean Theorem: a²+b²=c²
Jun 21, 2022

How do you create a formula? ›

Create a formula that refers to values in other cells
  1. Select a cell.
  2. Type the equal sign =. Note: Formulas in Excel always begin with the equal sign.
  3. Select a cell or type its address in the selected cell.
  4. Enter an operator. ...
  5. Select the next cell, or type its address in the selected cell.
  6. Press Enter.

What does simple formula mean? ›

Updated on August 09, 2019. The simplest formula of a chemical compound is a formula that shows the ratio of elements present in the compound in terms of the simplest positive ratio of atoms. The ratios are denoted by subscripts next to the element symbols. Simplest formula is also known as empirical formula.

What are the three factors needed in determining the amount of simple interest? ›

There are only 3 common factors to be considered with regards to simple interest.
  • Principal. This is the amount of money being borrowed. ...
  • Rate of Interest. This is the percent to be used to calculate the additional amount to be paid along with the principal. ...
  • Time.

What are the 3 main factors that affect interest rates? ›

The interest rate for each different type of loan depends on the credit risk, time, tax considerations, and convertibility of the particular loan.

What are the two most common methods of calculating interest? ›

Interest can be calculated in two ways: simple interest or compound interest.
  • Simple interest is calculated on the principal, or original, amount of a loan.
  • Compound interest is calculated on the principal amount and the accumulated interest of previous periods, and thus can be regarded as “interest on interest.”

What is the conclusion of simple interest? ›

In Conclusion

Simple interest is one way to calculate interest over a fixed amount over time. The rate of interest remains constant throughout, and the principal amount remains unchanged.

How does simple interest relate to speed? ›

Simple interest is calculated by multiplying the principal, the amount of money that is initially invested or borrowed, by the rate, the speed at which the interest grows, and the time, how long money is being invested or borrowed. In other words, the formula for simple interest is I=PRT I = P R T .

Can you give me an example of interest? ›

Interests are topics, ideas, or subjects that interest you, fascinate you, and you want to learn more about. Culinary art, history, and classical music are all examples of various interests.

In what time will $400 amount to $512 if the simple interest is the calculated at 14% per annum? ›

So it would take two years for an amount 400 to become 512 If the an annual interest rate is 14%.

What is the interest earned on a 2 year loan of $500 with 4% simple interest? ›

A 2-year loan of $500 is made with 4% simple interest. Find the interest earned. Answer: The interest earned is $40.

What is the best example of interest? ›

Interests are subjects that fascinate you and want to learn more about. Interests are usually more about learning and discovering ideas, concepts, and knowledge like history, animal behavior, or even pop culture. For example, if your interest is history, going to museums would be your hobby.

How do you find the interest? ›

Here's the simple interest formula: Interest = P x R x T. P = Principal amount (the beginning balance). R = Interest rate (usually per year, expressed as a decimal). T = Number of time periods (generally one-year time periods).

Where do you use simple interest? ›

Simple interest is typically used when obtaining credit card loans, car loans, student loans, consumer loans, and sometimes even mortgages. On the other hand, compound interest is often used to boost investment returns in the long term, like 401(k)s and other investments.

What is the simple interest if $1000 is borrowed for 5 years at 5% interest? ›

5% = 0.05 . Then multiply the original amount by the interest rate. $1,000 * 0.05 = $50 . That's it.

How long will it take 200 to double itself at 10% simple interest? ›

Hence, it will take 10 years for the sum of money to double itself with the rate of 10% per annum simple interest.

How many years will $12000 yield an interest of $13230 at 10 simple interest? ›

Hence, 11.025 years will be taken.


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